having a sense of what you own your assets and what you owe your
liabilities is important because it provides some
measure of your financial security and your ability to accomplish financial
goals such as buying a home starting a business or retiring someday
your net worth is quite simply your financial assets
for example bank and investment accounts minus your financial liabilities
debts such as student loans and credit card debt
to calculate your financial assets access your bank statements and
investment account statements including retirement accounts and any
other documentation that can help you you may have only one or two accounts
and that's fine add up all the values of these accounts
to find out what you own it's common for most young adults to be
in the early stages of accumulating assets
in addition to excluding personal property and possessions because folks
don't generally sell those to accomplish their personal and financial goals
i would also probably exclude your home as an asset if you happen to own one
you can include it if you expect to downsize or to rent in retirement and
live off of some of your home's equity most people accumulate debts and loans
during periods in life when their expenditures exceed their income
you may have student loans an auto loan and credit card debts
access any statements that document your loans and debts
and figure out the grand total of what you owe
after you total your financial assets and your financial liabilities
you can subtract the latter from the former to arrive at your net worth
financial assets minus financial liabilities equals
net worth don't worry if you have a small or negative net worth
where you have more debt than assets there's no point ringing your hands over
the results you can't change history and it doesn't
matter how you compare with your peers even if we can accurately define exactly
who your peers are this isn't a competition or test but you
can change the direction of your finances in the future and boost your
net worth surprisingly fast to work toward accomplishing your personal goals
first you have to figure your savings rate and how to increase it
to accomplish important personal and financial goals such as buying a home
starting a business traveling and someday retiring
most folks need to save money some exceptions do exist
such as those folks who have trust funds or inherent significant enough sums that
they don't need to save money from their work earnings
but the vast majority of people must save in order to accomplish their goals
you can't effectively save for a long-term goal if you don't know what
your savings rate is most people can tell you how much they
earned from their work over the past year
but few folks know what portion of their employment income they were able to save
that's because to have an accurate idea of this percentage
you really need to do some analysis and calculations
the math isn't that complicated but it does require some time and effort
especially if you haven't been tracking your spending or net worth over the past
year the first way to determine your savings
rate is to tally your employment income and expenses over the past year
by subtracting your total expenses including taxes from the past year from
your employment income you can arrive at net savings the
employment income part of the equation is simple for most folks
it's simply the total amount of your paychecks from work
but unless you systematically track your spending that piece of the puzzle is a
lot more work to figure if you don't want to be bothered with
the time consuming task of tabulating your spending over the past year here's
an alternative method for arriving at your savings rate that may be quicker
for you follow these few easy steps one
calculate your net worth two calculate your net worth from one year ago
you can determine your year ago net worth by tallying your financial assets
savings and investments from one year ago and subtracting your financial
liabilities loans and debts from one year ago don't
count your home as an asset or your mortgage as a liability
your concern here is financial assets three correct for any changes in value
of investments you own the past year if you have debt that you've been paying
down over the past year you can count the principal payment
reduction on that debt as savings if you expect to someday apply for a
loan of any type and get a competitively low interest
rate you should understand your credit report and credit score
and how to improve them a credit report is basically your credit history
while a credit score is a three-digit score based on the information in your
personal credit report most people borrow money at various
times in their life whether it's to buy a home or other real estate
to finance a small business pay for educational expenses or for
other purposes when you want to borrow money lenders
examine your credit report and your credit scores to determine how
responsible you've been with credit and to help them decide whether they
should lend you money and if so how much to charge you specifically
lenders examine your history of credit usage in your credit report
this information tells the lender when each of your accounts was opened
what the recent balance is your track record of making payments on time
and whether you've defaulted on any loans a credit report also tells a
prospective lender who has recently accessed your credit
report and thus would indicate where else you've been applying for credit
lenders use your credit score to help them predict the likelihood that you'll
default on repaying your borrowings the higher your credit score the better
because a high credit score means that you have a lower likelihood of
defaulting on a loan thus more lenders will be willing to
extend you credit and charge you lower rates for that credit
you want to get your hands on your credit report so you know what lenders
are reviewing you're entitled to receive a free copy
of your credit report which does not contain your credit score
every 12 months from each of the three credit bureaus
equifax experian and transunion credit reporting bureaus and the
creditors who report credit information to these bureaus make
plenty of errors if your problems are fixable
there's no need to hire someone to do so for you you can direct getting them
fixed yourself but you will likely have to make some
phone calls or write a letter or two some credit report errors arise from
other people's negative information getting on your credit report
this can happen if you have a common name have moved a lot
or for other reasons if the problematic information on your credit report
appears not to be yours tell that particular credit bureau and
explain that you need more information because you don't recognize the creditor
creditors are the source of some reporting mistakes as well
for example perhaps a bill you paid off is still incorrectly being reported as a
balance you owe if that's the case with your report
write or call the creditor to get the incorrect information
fixed phoning first usually works best the credit bureau should be able to tell
you how to reach the creditor if you don't know how
if necessary follow up with a letter or an email
you can also dispute errors online directly with the credit reporting
agency take an interest in improving your
credit standing in score rather than throwing money away to buy
your credit score or paying for some ongoing monitoring service to which you
may not pay attention working to boost your credit rating is
especially worthwhile if you know that your credit report contains detrimental
information or if your score is lower than 740.
here are the most important actions that you can take to boost your
attractiveness to lenders check your credit reports for accuracy
correct any errors and be especially sure to get accounts
removed if they aren't yours and they show late payments or are in collection
pay all your bills on time to ensure on-time payments
sign up for automatic bill payment which most companies encourage customers to
use this enables companies to automatically
deduct typically monthly what you owe from your checking account
or to charge that amount to your credit card so you don't have to remember to
pay the bill this also prevents you from being
charged interest or late fees when you make a payment
after the due date be loyal if it doesn't cost you
the older the age of loan accounts you have open the better for your credit
rating closing old accounts and opening a bunch
of new ones generally lowers your credit score
so don't jump at a new credit card offer unless it's really going to save you
money such as if you're carrying credit card
debt at a high interest rate and want to transfer that balance to a
lower rate card or provide you with rewards or benefits
greatly in excess of any costs ask your current credit card provider to
match a lower rate you find elsewhere limit your total debt and number of debt
accounts the more loans especially consumer loans
credit cards auto loans and so on that you hold and
the higher the balances the lower your credit score will be work
to pay down consumer revolving debt such as on an auto loan and credit cards
regardless of how much or how little you have invested in banks
mutual funds or other types of accounts you want to invest your money in the
wisest way possible and have it grow over time without
exposing it to extraordinary risks making the best investments without
understanding your range of options and the strengths and weaknesses of each
is difficult do you understand the investments that you currently own
including your potential returns and risks if you invest in
or plan to invest in individual stocks do you understand how to evaluate a
stock including reviewing the company's
balance sheet income statement competitive position price to earnings
ratio versus its peer group and so on last but not least are issues
that come up if you work with a financial advisor for investment advice
do you understand what that person is recommending that you do
are you comfortable with those actions and that advisor and is that person
compensated in a way that minimizes potential conflicts of interest in the
strategies and investments he or she recommends
for many working people taxes are either the number one or two
largest expense categories for starters do you know what marginal income tax
bracket combined federal and state you're in
and do you factor that in when selecting investments
for money outside of retirement accounts do you understand how these investments
produce income and gains and whether these types of investments
make the most sense given your tax situation
short-term money includes money you'd use in an emergency
or for a major purchase within the next few years
do you have enough money set aside for short-term emergencies
and is that money in an investment where it doesn't fluctuate in value
is the money that you're going to need for a major expenditure in the next few
years invested in a conservative low
volatility investment long-term money includes money set aside
for longer term use such as for retirement
do you have your money in different diversified investments that aren't
dependent on one or a few securities or one type of
investment that is bonds stocks real estate and so
on is the money that you've earmarked for
longer term purposes more than five years
invested to produce returns that are greater than the rate of inflation
do you know when it makes sense to buy insurance through fee for service
advisors and companies that sell directly to the public
bypassing agents and when it doesn't do you shop around for the best price on
your insurance policies at least every couple of years
do you know whether your insurance companies have good track records when
it comes to paying claims and keeping customers satisfied
do you understand the individual coverages protection types
and amounts of each insurance policy you have does your current insurance
protection make sense given your current personal and financial situation
as opposed to your situation when you bought the policies
if you wouldn't be able to make it financially without your employment
income do you have adequate long-term
disability insurance coverage if you have family members who are
dependent on your continued working income
do you have adequate life insurance coverage to replace your income should
you die do you carry enough liability insurance
on your home car including umbrella or access liability
and business to protect all your assets too many young adults leave home being
experts in spending without having learned much about living within their
means and saving and investing many things may
tempt you the never-ending stream of gadgets and
electronics cars restaurants bars nightclubs new clothing
concerts sporting events and so on being overwhelmed with debt which may be
exacerbated by a job loss or unexpected expenses
can cause folks to fall behind on their student loan or other debt payments
given the ridiculously high cost of college these days
the amount of student debt that some young graduates have accumulated is also
ridiculously large filing your annual tax return and making
quarterly tax payments if you're self-employed
aren't enjoyable tasks in fact you may find these chores downright intimidating
and stressful but if you fail to complete them
correctly or complete them at all you could get sucked with hefty interest
in penalty charges and possibly do some jail time in the worst cases
you work hard to earn money and then to save it so you should do your homework
to ensure that you invested well don't rush into making an investment you
don't understand because you have a lot to lose
there are plenty of slick talking salesmen who will sell you an investment
that helps to line their pockets but not yours you also don't want your
money sitting around for years on end in a low interest bank account which is
what often happens to folks who don't know how to invest
most young people don't spend a lot of time thinking about risks
after all most young adults are healthy and energetic
so things like health insurance or disability insurance seem
unnecessary and for older folks the good news is that insurance costs less when
you're younger because you're less likely to suffer a major illness or
disability than someone decades older than you
many companies and people have something to sell
some of what they're selling is good stuff much is mediocre
and some is downright awful you don't need to pay high commissions or end up
in the wrong type of investments or
insurance
you