Keys To Wealth Building (Part two)
This is part two in the series of keys to wealth building. I first would like to thank you for reading these articles and I hope you are finding them beneficial. There is nothing worse than stressing over money matters. The loss of sleep plus the worrying about how to make ends meet do take a toll on our health. If you apply just some of these suggestions I am providing, you will find your financial condition improving and consequently, your spirit as well.
When there are options to decide on to building wealth, many people are paralyzed in exactly what the correct steps should be taken. Which solution would be in the best interest, saving income, or paying off debt?
As hard as it may seem to pay down debt, it is sometimes even harder to save. It is important to always save some income for emergencies, but at what costs is it not worth sacrificing? This decision is not easily answered, because everyone has different, unique circumstances. One option is to just compare the interest rates of what the debt is costing you versus what the savings would be earning.
Let’s create a starting point to become debt free and build wealth. The first crucial step is to find your Net Worth.
Net worth is simply a math equation, your assets minus your liabilities. You can either write this all down, or simply use a computer to analyze and record your findings. I used Microsoft Excel, a spreadsheet to figure out exactly what my net worth was.
In Excel, the first column will be all your liabilities listed with the balance totals. List all your liabilities: Mortgage, car loan(s), credit card balances, house and car insurance, and student or bank loan(s). Now your monthly payments for utilities, groceries, gasoline, etc, the costs of just living, will be added to the total liabilities in the next article. For right now, we just want to find out what our net worth is.
This amount is your Total Liabilities. For illustration purposes, below is an example of how your liabilities spreadsheet may resemble:
First National Bank
Now enter the amounts in column B.
Save this spreadsheet under the name Liabilities, or even better, skip several columns over to list your assets. This way, you have all your data on one sheet.
Now list all your assets, your house, your vehicles, savings accounts and checking account names, salaries, retirement funds, like 401K’s and IRA accounts. Also list your valuables, such as stocks, jewelry, collectibles and household items, like furniture, appliances, and art. In the next column, list the market value of each. For example, your house, if it was to sell today, what could you expect the appraisal value is worth. This is the amount you will enter for each of your assets.
In the last row of the amounts entered, find the total value of all your assets. To find your net worth, simply subtract your liabilities from your assets totals. This amount is your Net Worth. So in column G, enter your assets. Below is an Illustration of what your asset lists may look like:
Now the fair market value of each asset in column H.
Then simply subtract your liabilities total from your asset total, to get your total net worth. $332,130.00 – $147,331.00 = a net worth of $184,799.00.
Generally speaking, most people will have more assets than liabilities. However, for people that have more liabilities than assets, this simple spreadsheet has helped them to understand where they stand. In order to get to where you want to be, you must first know where you are at. This discovery, even though it may look gloomy, is the first step to wealth building, and becoming debt free. Like taking a long road trip, you need a map to prevent from getting lost.
This spreadsheet represents where you are at, a map, so to speak, to show you where you are starting from. You can not expect to get debt under control until you see where it is coming from first. After you see what your total debt is, the next task will be how to correct it by reversing engines and taking control.
The above examples give an insight into your overall financial health. This does not show, however, how to budget your payments so that all payments can be paid on time. In the next diagrams will show what can be added to help with budgeting monthly payment plan.
In my next article I will discuss various ways of reducing these debts to a more manageable set of expenditures. By reducing, or maneuvering the monthly expenditures just slightly, you can add more monthly income to your bottom line. I will show a plan of what I have used to get my debts under control. Slowly, I am adding to my assets by paying off debts, in a systematic procession. So in your spreadsheet, column C, enter the due dates for each of your payments, like the example below:
Then in column D, enter the minimum payment that is due each month, an example as follows:
Giving you a total of $2,584.46. In column E, enter the amounts you paid for each item on your list, as follows:
Giving you a total of $2,650.27. The above illustration represents the added columns to break down the monthly payment schedules. It shows that the debt is getting paid down a little at a time. The credit card payments of $92.00 and $323.00 are the minimum payments due each month. Adding just a little more to each payment, the debt will be paid off a lot faster.
The most critical payments to pay off as soon as humanly possible are the credit cards. It is widely known that if a person chooses to just pay the minimum amounts due each month, it would take between 20 and 34 years to pay these small balances completely off. The higher the interest rate, the more the credit card companies profit from you. So if a higher payment can be made on the credit card balances, it is in your best interest to get these paid off as quickly as possible!
The furniture will be paid off in 11 months; The Honda will be paid for in 33 months; The Expedition will be paid for in 6 months. Etc, Etc. Part Three of this series will open up other possible scenarios to reach the ultimate goal of getting debt free. It will also give examples of why it is so important to take care of the credit card balances. What a FICO score is and how with a little work, you can improve your FICO score