Let’s start with this big question:
Do you know what your long-term financial plan is?
There may be many things that you are not aware of when it comes to your finances, but since you’re not a financial expert, how would you know? The only way to find out is by looking at everything that impacts and affects your finances. Once you have that global perspective, you can make your money work for you. That is how the wealthy stay wealthy.
Q: Why should you embrace the Big Picture of your Finances?
A: Because by doing so, you will be better at making long-term decisions as well as the important short-term choices that can create financial success.
But what if you just don’t understand? All that financial jargon just doesn’t make sense, and you don’t see the deeper meaning of these financial benefits.
A Story from Chris: I’m no Artist
For me, if the subject were to turn to art or fashion I’d fall flat on my face. I don’t have a passion for art. I respect and marvel at those who do, but I struggle every time I need to perform an artistic task. You could say my world from an artistic standpoint is flat. Luckily for me, appreciating and understanding art is not a skill that I’ve needed to be successful in life. Kudos to those who are successful with it!
On the other hand, I love processes and analytics and I could talk about those topics for hours. For so many others, the world of money and finances is flat. It may seem like different financial products and savings vehicles are only supposed to make sense to an elite group. Unfortunately, most of us need not only to function with but also succeed with financial matters if we do not want to live in a state of constant financial stress the rest of our lives.
Fortunately, there are only two very important numbers that you need to monitor carefully:
1. Your Net Worth, which is the result of investing wisely, and
2. Your Savings Rate, which is the result of spending less than you earn.
These two numbers build the structural foundation of your wealth plan and CalcuTrack makes them simple to calculate and understand.
Do you know your current Net Worth? Net Worth is the most important measurement of one’s wealth. Your Net Worth is the difference between your assets, or what you own, and your liabilities, or what you owe to others.
It is the only number that measures your total wealth. It also is evidence of how your money was managed in the past. Often, people only begin to think about their Net Worth when they are nearing retirement and wondering if they will outlive their savings. While it is never too late to start thinking about Net Worth, I encourage you to consider it long before you retire.
Periodically reviewing your Net Worth is a great way for you to track your financial progress over time. This number will tell you if you’re moving in the right direction or going backwards – which, with bad financial habits, could be the case. Focusing on Net Worth avoids the common tendency to look selectively at numbers that look good or to over-focus on just a portion of your financial picture, such as income or money in the bank.
With CalcuTrack your Net Worth figure can easily be compared to others of similar age or income level to see where and how you rank. It can give you peace of mind knowing factually where you stand and how you measure up to your peers. Understanding your Net Worth is the foundation for further financial analysis, creating a snapshot of your current financial situation and offering some actionable insights into your wealth.
Furthermore, when you apply for a loan, most financial institutions will ask for a Net Worth statement, so that they understand your total assets and how they might mitigate their own risk. Depending on the health of your Net Worth statement, it may make it easier for you to borrow money or to get a lower interest rate.
It is possible for someone to have negative Net Worth? In fact, a lot of people do. According to MarketWatch, one in five American households have a zero or negative Net Worth . Shocking, right? What you need to ask is this: Over time, is your Net Worth going up or down? Which brings us to our next critical term.
Savings Rate is the second very important figure you need to know. Your Savings Rate is your income minus your expenses, expressed as a percent of all your income.
Confused? You don’t need to be. Here is a simple example. You and your spouse have total income of $80,000 per year. You spend $72,000 per year, leaving you with $8,000 in savings. ($80,000 – $72,000). $8,000 divided by $80,000 is .10 or 10%. Your Savings Rate is 10%.
As you can see, your Savings Rate directly affects your Net Worth, driving it up or taking it down month after month, and year after year.
For many people who are just starting on a path to financial literacy or to improve their financial situation, the number one focus should be their Savings Rate. The first and most important question is:
Are you living within your means?
Yes, living within your means implies that you sometimes have to say no to yourself or to loved ones about spending. Although that can be very difficult, please remember there’s a reason that Warren Buffett drives an old Cadillac and lives in the same house he purchased in 1958!
A positive Savings Rate lets you sleep well at night because it means you are building a financial cushion that you can use in case of an emergency. It is also telling you that you are in control of your money and that money is not controlling you.
I believe we should all create a rainy-day fund with the money from our savings. A rainy-day fund is simply money you have saved in case of an emergency. By doing this you will already have accomplished what most people have not. Here’s an alarming statistic: Did you know that 40% of Americans cannot afford even a $400 emergency? To avoid that situation, or to get out of it if you are already there, you’ll want to start saving enough money for 30 days’ worth of your normal expenses. Once you have done that, set out to save for 60 days, 90 days, and more, of regular expenses.
Learning about your personal Savings Rate and consistently saving money over the long haul is the best financial habit you can develop. To start, you’ll need to track your monthly income and expenses, deduct the expenses from your income, and voila, you’ll have your Savings Rate. CalcuTrack makes this task easy for you!
I always tell my kids they should start out by creating a rainy-day fund, and then begin using some of their savings to pay off their debt. Afterwards, they can focus on their retirement and investment accounts. By doing so, they will have their savings generating income and dividends for them. At some point, they may even be able to become the bank to others by buying stock, rental houses, or providing venture capital to a business. I hope they heed my advice!
In our next chapter, I’ll discuss the various stages of one’s financial life.
Chris’s Take Away
Calculating, analyzing, scoring and tracking your two most important numbers—your Net Worth and your Savings Rate—will pay great dividends to you in the long-term. Understanding these two figures allows you to create actionable plans and insights to your wealth. In particular, knowing your Savings Rate empowers you to live within your means—the first key to growing your Net Worth and achieving financial success.