Once she has her credit report in order, our heroine Jane investigates whether to refinance her home. For most people, their mortgage is their largest debt. Of course, since borrowing money costs money, banks and mortgage companies charge interest. Do you know what interest the mortgage company or bank is charging you? Look at your payment book. That should tell you. If it doesn’t, call the bank or mortgage company and find out what it is. You’ll need to know this as you create your plan.
Jane knows that interest rates have dropped, but she needs to find out how much it will cost her to refinance to determine if it makes sense to do so. Jane also wants to think about whether to substitute a 15-year mortgage for her current 30-year mortgage. The shorter mortgage will cost her a bit more money each month, but if the rates are lower, she may not feel the difference. And, paying off her home earlier will save her a lot of money in interest costs.
Jane also looks at her car expense, a lease. This monthly expenditure is not creating any asset for her—she will have nothing she owns at the end of her lease. She has just a few months to go before her lease is up. Jane decides that when her lease is up, she will buy a car, so then she will have another asset.
When you pay it off, you can find out the “market” value of your car by looking it up in the “Bluebook.” You can find this easily on the Internet for free. The difference between the liability of the car loan and the market value of your car is an asset.
Jane also starts to plan for saving. Her employer offers such a plan, but Jane has been so worried about paying her bills that she hasn’t taken advantage of it. Not only that, but Jane’s 401(k) has a match by the employer at 2 for 1. That means that for every dollar Jane contributes to the plan, her employer contributes two dollars. By not participating in the plan, Jane has left a lot of money on the table. But, it’s never too late and Jane decides to enroll in her 401(k) plan immediately.
What Jane sees when she enrolls is that the money she puts into the plan is not taxed. That’s additional savings to Jane. Her gross income is reduced by the amount she sets aside for the 401(k) plan, and her income and employment taxes are also reduced. For the first time, Jane starts to feel much better about her financial position.
As Jane works through the net worth statement, she sees that she does have some assets she didn’t realize. One simple definition of assets is things you own that can be sold for cash.
For example, Jane has furniture, jewelry, and clothing that could be turned into cash, if necessary. She adds those to her assets.
The mortgage Jane pays on her house is a liability (what she owes the mortgage company) and the asset value of her house is what’s left if she sold the house and paid off the mortgage. The easy way to find out what your house is worth is to look online for sales of comparable properties. Then, you can estimate the difference between the mortgage amount and the estimated “market value” of your house—that difference is an asset. Jane finds a comparable property and decides on the asset value of her house.
Jane finishes her Net Worth Statement (see graphic)
Jane’s negative net worth is a problem, but she is taking steps to correct this with her plan to pay off her credit card debt and put money into her retirement plan at work.
Her debt position is not terrible. Her goal now is to increase her net worth.
But, it is important to list all the debts she owes. Have you listed all the debt under the liabilities columns on your net worth statement? Take a look around. Do you owe money on furniture, major appliances? Is there anything you’ve missed? Do you owe any loans to family or friends? Those go under liabilities. Do they owe you any money? Those are assets.
For Jane, completing the forms to find out her cash flow and net worth were difficult. She had to face what she saw in black and white. And, she finally had to assemble all her bills to do that.
Now she feels elated. She’s done the hard work of pulling the information together and already is has helped her get more control over her financial situation.
How difficult was it for you? If you had to hunt around for all the paperwork you needed to figure this out, go back to our section on getting organized and use the manila folder system (archives are online at ChesapeakeCurrent.com in case you missed that issue).
Remember, every time you open a statement and pay a bill; put the statement stub in the file. Store all your folders in one place where you can find them easily. Never let a statement go by again without putting the statement stub into its envelope or file. Household bills? Same thing.
Create a file or envelope for bank statements, utility bills, dry cleaners, travel, and everything you use currently. When you fill up your tank with gas, get a receipt and put it in an envelope or file. It’s important to keep a current record of your financial position. But, there is no point in piling papers up so they never become useful. Organize the paperwork. Keep it up and you’ll be surprised how much better you’ll feel just knowing where you are financially.
By now, you have figured out how much you need to live on and how much you make. What do these numbers look like? Are there areas where you could economize and decrease your expenses so that you can invest on a regular basis? Do you have credit card that must be paid off? Do you have money in your checking account paying you no interest that could be put to work for you?
Related Article: Cash Flow and Net Worth
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.