Before the Ball Drops
December 30, 2014New Year’s Eve is a time to reflect on the past and ponder your future, but many of us spend more time planning how we will be celebrating on the last night of the year instead of planning ahead on how to achieve our New Year’s resolutions.One of the most common resolutions is to improve financial well-being, either by saving more or paying down debt. So before you head out tomorrow night, reflect on your financial past by taking the time to calculate your net worth so you know where you stand as we head into 2015.
What is your net worth? It is the difference between what you own and what you owe and provides you with a snapshot of your financial situation. If you own more assets than you owe in liabilities, then you have a positive net worth.
Before you count down to the ball dropping in Times Square, do your own count and figure out where you stand as you head into the new year. Take a few minutes to fill out this Net Worth Worksheet by listing everything you own, such as your home, vehicles, furnishing, jewelry, savings accounts, investments, and your retirement accounts. Then subtract your liabilities, which could include your student loan, mortgage, and credit card balances.
If you find you have a negative net worth, it does not necessarily mean that you are financially irresponsible. It just means that right now you have more debt than assets. Perhaps you are just starting out and you have a hefty student loan, or you bought a home at the top of the real estate bubble a few years ago and now find yourself upside down on your mortgage.
Just as many of us will step on the scale to start our diets in January, your net worth number can be compared to the weight you see on the scale. But in this case, we want our net worth number to increase, instead of dropping those pounds. Here are a few tips to increasing your number:
1. Commit to not living paycheck to paycheck and spend less than you make each month.
2. Pay yourself first and set aside at least 10% of your income to build up your savings. (This increases the asset side of your net worth equation.)
3. Tackle your debt since your liabilities decrease your net worth. Put away the credit cards, avoid the temptation to buy a new car that comes with a hefty car payment, and pay extra towards the debt that has the highest interest rate. Use the Debtblaster to calculate how quickly you can pay down your debt.
4. Build up your retirement nest egg. Contribute at least another 10% of your income to your employer-sponsored retirement plan through payroll deduction or open an IRA. Even after the last drop of champagne has been toasted and all the confetti has been swept away from Times Square, you will still have until April 15th of 2015 to make an IRA contribution for 2014.
Most people associate wealth with a high income, but true wealth comes from steadily increasing your net worth. If someone has a significant income, but spends more than they make, they will forever have a negative net worth. However, if you simply focus on spending less than you make and gradually increase your net worth, you will be in a much better financial position next year no matter how high or low your income is.