The journey to financial enlightenment and freedom starts with a little math and accounting. We are going to start you off with a "financial physical" – you are going to draw up your own personal balance sheet.
For many people, the mere mention of the words “balance sheet’ would send them into a deep coma. Before you go nodding off, be assured that this exercise is more interesting than you think. We are going to draw up a list of your personal assets and liabilities, and use that list to calculate your net worth.
We are going to use the conventional definition of assets and liabilities because later on in the training we are going to rip up the rule book and provide a modern definition of assets and liabilities.
Open up a spreadsheet and let the games begin. This spreadsheet is going to serve as your personal financial scorecard. It will give you an indication of how you are performing down the road to financial freedom. Step 1: Assets In this part of the analysis, you need to include anything you own which has a positive monetary value. When it comes to placing a value on your assets, you need to be conservative. You also need to differentiate between the market price of an asset and the sentimental value you might attach to that asset. Your Jennifer Aniston restraining order that you framed and hung in your guest toilet may be worth $5,000 to you, but on the open market, it may not be worth more than a couple of dollars. You will need to be mega realistic and even more conservative on your asset valuations:
Cash and money in the bank
Your home’s current resale value
Investments – mutual funds, college savings accounts, shares, retirement fund
The current market resale value of your car
The re-sale value of personal property - jewelry, household items
Step 2: Liabilities These are all your financial obligations, loans, or debt which must be paid. Liabilities tend to be easier to value because they tend to be defined in monetary terms:
Your outstanding mortgage balance
Personal loans
Car loans
Credit card balances you still need to pay off
Student loans
Step 3: Calculate your net worth
It is important to work out the difference between your assets and your liabilities. You need to total up your assets and total up your liabilities. If your assets are greater than your liabilities, you have a positive net asset value. Financial freedom is obtained by having far more assets than liabilities. Negative net asset value is when your liabilities exceed your assets.
You can start to increase your net worth by:
Gradually increasing your assets
Decreasing your liabilities by paying off debts.
Doing both at the same time
Why is this an important exercise? To stay on top of your financial goals, it is a good idea to update your personal balance sheet every quarter or at six-monthly intervals. Motivation is obtained when progress is witnessed. If you can see your net asset value increasing in value, it produces a positive mindset which can be turned into positive momentum.
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