IN THIS CHAPTER
Determining your net worth Calculating your savings rate Getting your credit score and keeping an eye on it Growing your investment portfolio Protecting yourself with insurance Examining common money mistakes Where did your childhood years go? Was it that long ago that you were concerned with what exams you had coming up, what you might be doing over your summer break, and what kind of job you were interested in and qualified to do?
As a young adult, you wonder where you are going to live, how much a decent apartment will cost, and how much you will actually have left over after taxes and those other pesky deductions that are taken from your paycheck. How much will it cost to buy a home that youâll really want? What are the best ways to save and invest your money?
And then life throws you a curveball like the COVID-19 government-mandated shutdowns which turned plenty of young peopleâs lives upside down in a way that few saw coming. Or perhaps an aging parent or other relative needs some help. How can you handle these situations personally and financially?
Those are some pretty big questions that even people 20 and 30 years older than you struggle to answer. Youâre wise to be thinking about these topics now. In this chapter, I help you start to answer those questions by showing you how to evaluate your net worth (addressing any debt, such as student loans, credit cards, or auto or other consumer loans). I also help you assess your savings rate, credit health, investment portfolio, and insurance coverage so you can develop and implement a winning plan tailored to your situation.
Calculating Your Financial Worth
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 desired car, buying a home, traveling, starting a business, or retiring someday.
In this section, I define net worth and then walk you through the relatively simple calculations of determining your own personal net worth.
Defining net worth
Your net worth is quite simply your financial assets (for example, checking, savings, and investment accounts) minus your financial liabilities (debts such as student loans and credit-card debt). In the following sections, I walk you through how to perform these calculations.
When I discuss your monetary
net worth, Iâm not talking about personal possessions. Your car, clothing, television, computer, and other personal items all have some value, of course. If you needed to sell them, you could get something for them. But the reality is that youâre unlikely to accumulate personal items with the expectation of later selling them to finance such personal goals as buying a home, starting a business, retiring, and so forth. After all, personal property declines rapidly in value after purchase and use.
Figuring what you own: Financial assets
To calculate your financial assets, access your checking/savings, and investment account records, including retirement accounts and any other documentation that can help you. You may have only one or two accounts, and thatâs fine. The COVID-19 pandemic has proven the absolute need for emergency fund savings. Add up all the values of these accounts to find out what you own.
Itâs common for most young adults to be in the early stages of accumulating assets. This book helps you change and improve upon that.
In addition to excluding personal property and possessions because folks donât 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 homeâs equity.) Include investment real estate â that is, real estate that you own and rent out.
Now, I do have one exception to something that isnât generally thought of as a financial asset, which you may or may not want to include in this category. Some people have valuable collections of particular items, be they collectible coins, sports memorabilia, or whatever. You can count such collections as assets, but remember that theyâre only real assets if youâd be willing to sell them and use the proceeds toward one of your goals.
Determining what you owe: Financial liabilities
Most people accumulate debts and loans during periods in life when their expenditures exceed their income. I did that when I went through college. You may have student loans, an auto loan, credit-card debts, or a medical or pet debt. Access any statements that document your loans and debts and figure out the grand total of what you owe.
Netting the difference
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 â financial liabilities = net worth
Donât worry if you have a small or negative net worth (where you have more debt than assets). Thereâs no point wringing your hands over the results â you canât change history. And, it doesnât matter how you compare with your peers even if we can accurately define exactly who your peers are. This isnât 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, which I discuss next.
Grasping the Importance of Your Savings Rate
To accomplish important personal and financial goals such as building an emergency fund, 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 inherit significant-enough sums that they donât need to save money from their work earnings. But the vast majority of people must save in order to accomplish their goals.
You canât effectively save for a long-term goal if you donât know what your savings rate is. When I worked as a financial counselor and taught adult-education money-management courses (which I now do online), I was struck by how few people knew the rate at which they were saving money. Most people can tell you how much they earned from their work over the past year, but few folks really know what portion of their employment income they were able to save. Thatâs because to have an accurate idea of this percentage, you really need to do some analysis and calculations. The math isnât that complicated, but it does require some time and effort, especially if you havenât been tracking your spending or net worth over the past year. In the following sections, I explain a couple of different ways to calculate your savings rate over the past year.
Calculating your income and outgo
The first way to determine your savings rate is to tally your employment income and expenses over the past y...