How do I track my investments?

There are all sorts of investment tracking systems, software and websites out there, and I’ve tried several. I really put a lot of effort about ten years ago into using Quicken’s software, which allowed it to download from your various investment and bank accounts and automatically update. The problem I had was when it mis-allocated some spend I did (calculating a grocery bill as something else, etc.) it was difficult (for me) to alter it. Within 6-9 months of getting it started, my bank accounts were not matching up with the downloads, and there were all sorts of issues.

As an engineer, I finally threw up my hands, opened up MS Excel, and created spreadsheets to do my bank and investment tracking myself. Since I’m a bit of a money nerd (like so many of us in the FIRE community) I started tracking my banking (both family and personal) in a spreadsheet to see how I did. That led me to get a better handle on my spending, and a better estimate for future spending & goals.

I also started tracking my investments with my own MS Excel spreadsheet. Again, I felt I had more control of the results, rather than a specific, cookie-cutter approach from someone’s software package. I could create my own reports, modify how I calculated results, etc.

So how do I use my spreadsheet? I’m going to assume everyone here has a basic knowledge of spreadsheets and can calculate (either by computer or by hand) the results.

I set my spreadsheet up with each investment on the X axis (i.e. down the left side of the paper) and my info for each investment on the Y axis at the top of the page. For each investment, I had the following categories:

  1. Name (ex. Vanguard 500 Index Fund)
  2. Note, i.e. information on where this investment was (ex. Wife’s Roth IRA, Mr. 39 Months 401K, etc.)
  3. Symbol for investment (ex. VFIAX for Vanguard 500 Index)
  4. Current price, updated at the beginning of each month
  5. Current Shares, updated at the beginning of each month (in case I invested, or dividends were paid)
  6. Current value (a calculation, price * shares)
  7. Value at the beginning of the previous month
  8. Additions/subtractions from investment during previous month (ex. Putting monthly investment into Roth IRA)
  9. Cost basis for investment (calculation of previous two, value at beginning of month + additions/subtractions)
  10. Gain/loss for previous month (calculation, comparing #9 to #6)
  11. Percentage gain/loss

Every month:

  • I take the “current value” from the previous report, and copy/paste the numbers to #7 (note: you need to copy the actual numbers over. If you copy the calculation, it will go haywire on you)
  • I put in how much I’ve added/subtracted from that investment in #8
  • Updated the shares & price

This gives me, for each investment, how much I made, and the percentage gain/loss (#10 and #11 above). I can also look at the values in #6 to determine my asset allocation, and if something needs to be changed.

It typically takes me less than 30 minutes to do this, and I’ve got about 45 different investments (counting 2 sets of IRAs, 2 sets of Roth IRAs, my 401K, Deferred, dividend account and “fun money” account). I find that I enjoy doing this, and it keeps me in better contact with my investments than just going to a website and looking at a report.

Guess I’m just a number’s junkie.

 

So how do you track your investments?

 

Mr. 39 Months

Tracking Lifestyle “creep” and what to do about it.

20 Something Finance had an interesting article on lifestyle creep (how its defined, how to track it, and how to avoid it). For those in need of an explanation, as defined by 20 Something “Lifestyle Creep (ˈlīfˌstīl krēp), noun: the very real, very unnecessary, and very self-defeating personal finance phenomenon of increasing one’s lifestyle spending as a direct correlation to an increase in one’s income over time.”

Basically, people start out with their base pay out of school (example, $35,000/year) and then get pay raises throughout their work life (3% here, 10% here when they change jobs, etc.). With lifestyle creep, folks just take that pay raise and roll it into their spending without thinking about it. Before you realize it, you are making $65,000, but don’t feel any richer (and aren’t any better financially) than when they were making $35,000. It is something that most of the western world suffers from. You get a nicer car, eat out at nicer places, move to a nicer neighborhood, and just don’t make any real progress financially.

He goes through various ways to track your lifestyle creep and then finishes with ways to combat it, including:

  • Continually monitor your expenses and be on the lookout for lifestyle creep
  • Trim and trade expenses (cut back on some things to pay for other things you want)
  • Practice gratitude and question every purchase
  • Pay yourself first (a FIRE staple)
  • Remind yourself of your goals

I went back and looked at my last five years of spending. I broke it out into our family spending (taxes, groceries, insurance, etc.) and my own personal expenses (clothing, gas, lunches/snacks, etc.). I also took out the mortgage spending for the first 2-3 years, as we are mortgage free now, and I wanted to get a good apples-to-apples comparison.

As you can see, we’ve roughly been running between $26K and $29K of family expenses. Remember that this doesn’t count medical insurance, just medical co-pays, etc.

For personal expenses, it looks like I’ve been trending down the last couple of years, and I’m running around$1,200/month.

 

Based on this analysis, I’d say I’m not really running a lot of lifestyle creep. When we paid off our mortgage, we dumped that right back into savings. We then found out a way in 2018 to put even more into savings and reduce our expenses (isn’t that the way it always is with FI?). I’d like to say we’ve avoided lifestyle creep, but I can say that from 1991 to 2000 (the first 9 years out of the army for me), we did experience a lot of it. I went from a $30K/year salary to a $56K a year salary, without a lot diverted to savings.

 

It wasn’t until 2000 (when I got a bump to $68K) that we started to dump all extra money into my 401K and our IRAs. From that moment on, we’ve kept our lifestyle fairly much around $50K – $55K a year (including mortgage) and all excess funds have gone into savings/debt payoff as we moved towards FI.

 

Good article to review for those folks looking for another metric to track their performance.

 

Mr. 39 Months

Update to draw down plan – May 2018

Okay, as I get more information, I continually have to look at adjusting my draw down plan – even as I hit 26 months to go. If you remember from my previous draw down update, the desire of Mrs. 39 Months to continue working, combined with the $64K limit to income for maintaining health subsidies had put me in a bit of a quandary. How do I match my spending to the need for health care? Spend too much, and I end up needing an additional $12K a year.

Well, I got a bid of a surprise with one of my company retirement accounts a week ago, which meant that I would be paying a large lump sum when I left the company (instead of being able to draw it out over time). However, this meant that the remaining funds were “post tax” and thus could be used without endangering me going over the $64K limit. Sweet!

So, based on that, updates on my current investments and plans for deposits over next 26 months, here is what I am looking at:

  • Savings: $132K (can spend without having to pay taxes)
  • Deferred Income from work: $156K (after taxes withdrawn – don’t have to pay taxes on it)
  • Brokerage Account: $87K (can spend about $60K of it without paying taxes. The rest will be taxable.
  • Inherited IRA from my father: $137K (taxable when we take it out)
  • 401K/IRAs: $613K (taxable + penalty)
  • Roth IRAs: $298K (non-taxable)
  • Total: $1,445K liquid assets (350K with no tax)
  • House: $298K (not depending on it unless absolutely necessary, i.e. no reverse mortgage
  • Expected expenses $54K + Mrs. 39 Months spending (assuming equivalent of her take home pay). This assumes having a taxable income below $64K, and thus keeping the subsidies

 

As you can see, I’m actually in pretty good shape. Current plan:

  • For first 6 months, pay for medical with Cobra and take $18K from Deferred (tax free) and mandatory $9K from inherited IRA
  • For each year following, Take $12K from inherited IRA each year, and pay very little tax on it. Should last for 10+ years (till I hit 67)
  • Take $42K from Deferred/post –tax. Should last at least three years (till I’m 60)
  • Move to my investment account. Should last for at least two years with limited taxes (Gets me to 62 and Mrs. 39 Months to 64). At this point, I’m assuming Mrs. 39 Months wants to stop working, so we bump up expenses to $72K a year
  • Draw down 401K at $72K a year. This should last us for 16+ years.
  • At that point, switch to Roth IRA, which has been growing for 20+ years without getting tapped, so it should have over $800K. This should last us for the rest of our lives.
  • Never touch the savings account/emergency fund, or the home value (these are our backups).

Note: all growth, expense and investments assume a 3% inflation rate.

Overall, I’m more confident now that I was a couple of months ago (even with the market not going anywhere). I could conceivably take a few months off my count and go earlier, but I don’t want to do that just yet.

How have your plans changed?

Mr. 39 Months

Original Draw down plan

Updated Draw down plan Mar 2018

 

When the World gives you lemons, FI people make Lemonade

As everyone knows, life gives you little “surprises” now and then, and folks have to be flexible and learn how to “roll with the punches” when that happens. Sometimes it’s pleasant surprises (hey, my company is giving out one-time bonuses) and sometimes it’s not (hey, my basement flooded).

Just recently, I found out that my company made a change to their deferred income (one of the ways they help with retirement planning). Previously, you could draw it in equal parts over a period of time (I believe the max was over a 5-year period). That was my plan, as it would enable me to keep the taxes on it low, and stay under my threshold for medical care (hopefully).

Well, apparently at the beginning of the New Year, they killed that option. Instead I have to take it as a lump sum when I leave the company. So, when I currently plan to hit FI (26 months away) I will take a sudden, massive $200K bump in my pay (in addition to my first six months pay for 2020). The taxes taken out will be nothing like I’ve had to pay before. Ouch!

I took out my pencil and paper (or computer and mouse) and started the calculations. I would end up giving up roughly $50K to Uncle Sam, just on this money alone. Yet, once I had paid it out, that money would become “post tax” money, so if I used it to live on over the next several years, I wouldn’t have to state it on my income taxes (just any interest/capital gains if I had invested it). If you remember the update to my draw-down strategy, I was very concerned about going over the $64K line for income, as this would cause me to lose subsidies for health insurance. I could use Cobra insurance (the insurance you can get from your former company for up to 18 months after you leave your job) – and then transition to paying my own insurance, with the subsidies.

Well now, I will have a pot of $150K (plus the expected $90K in my investments) that is post-tax. Even if Mrs. 39 Months works for several years, I don’t see a reason why we can’t keep under the $64K cap. If she gets a really great job, then I’ll just force her to pay for benefits!

So in the end, it all ended up being OK. Actually better than OK – because the money I save for the subsidies more than offsets the additional up front taxes.

So always look at your finances and play off different scenarios. If I had, I would have determine that, even if the company still had the 5-year stretch out option, it was better to take the money up front.

How have you made lemonade this year!

 

Mr. 39 Months

Exploding your savings rate!

While a major part of the FIRE philosophy is enhancing your income via excelling at work and doing side hustles, another key part is frugality and minimizing your expenditures, so you can maximize your savings rate. In my opinion, the frugality/minimize path is the more effective, because most increases in your income will see a portion taken out for taxes. Any money saved via frugality is post-tax, and therefore goes straight to the bottom line.

One thing you can do is to tray and maximize whatever company benefits you may have, so that you don’t have to spend the money (and be taxed) yourself. Whenever your company benefits package comes out, get a copy and look through them for what discounts or free-stuff is available that you might want to use. Some examples include:

  • Learning Opportunities/Training
  • Discounts on products & services (movie tickets, computers, entertainment, etc.)
  • Insurance (low-cost Life, Disability, etc.)
  • Reduced cost legal services

Use these benefits to try to further cut your expenses, and then bump that money into your savings and investments.

One of the things my company has is a Deferred account – the equivalent of a 401k (paid with pre-tax dollars). You basically don’t get paid this money, you “defer” it to a later date. You can start withdrawing it after you’ve been with the company for 5 years. If you leave the company, you have to take the money out – and pay taxes on it. You can take it out as a lump sum (dumb) or break it out to receive a monthly amount for a period up to 5 years. It’s like a 401K that you could access at age 35!

Previously, I was putting in 6% of my paycheck (the max was 25%) and 25% of my annual bonus (I could put in 100% of bonus). You have to make the decision in December for the following year, and then its locked in. In 2017, I was also putting away $1,376 a month into regular investments, so I’d have something to help “tide me over” from early retirement to age 59 (when I could access my IRAs).

I dawned on me that I could put away 25% of my take home, and that would be around $1,300 per paycheck, or a little more than twice was I was putting away to that investment account. In addition, my cash flow still let me put $300 into that investment account each month. Let’s see, save $1,376/month or $2,900/month? Tough choice. I also realized that, based on my spending, I didn’t really need to get my bonus in 2018. Switch that to 100% to deferred. The result?

 

Bam! Savings rate went from 30.1% of gross pay to 55.9% of gross pay. In addition, I am building up a sizable chunk of money that, when I chose to retire, I can take it out and use for living arrangements with no penalty. While its taxed, I plan to be in a much lower tax bracket by then. Based on this, I won’t have to dip into my 401K/IRA money till well past 59-1/2. Maybe use this to help do some Roth IRA conversions?

After calculating this in early 2017, I felt like quite the idiot for not doing it in 2017. I also realized that I could use this to retire a full year earlier. Shortly after that, I started the 39 Months blog.

So check out your company benefits and other ways to cut your expenses – and then put those funds into investments!

 

Mr. 39 Months

Financial Update – Disaster File

If you remember back at the beginning of the month, I realized that I had to update our personal files, or our “Disaster Files.” This was the files showing investments, wills, titles, etc. Often folks do this once every so often (many times after a family member passes away) and then let it lie fallow till the next “emergency.” Yep, I was one of those folks, having not touched it since 2013. In my previous post I attached a couple of helpful documents that I hope folks find useful.

Well, I dove into it during the month, and so far, here is what I’ve gotten done:

No Description
1 Update Master List from 2013
2 Send Master list to Mrs. 39 Months
3 Price out updating wills
4 Redo filing cabinet with Master List & Disaster file #1
5 Household budget folder (budget goals, income statement, balance sheet, income/expense forecasts)
6 Housing Information (Title, insurance, receipts for work, property taxes)
7 Online passwords
8 Location of keys to safe deposit box – Mrs. 39 Months drawer
9 Credit records: Resolution of past debts (auto, home)
10 Home Insurance Policy
11 Net Worth’s 2009 to present
12 Annual updates for Jan 1, 2017 into investments
13 Investments (list of accounts, goal planning, annual balance sheet)
14 Taxes: Tax records for previous year, current year documents
15 Personal background info (Education, personal history, resume)
16 Credit: Resolution papers of past debts, credit card names, numbers & 1-800 number
17 Health insurance (Booklet from work, health history, medications, etc.)
18 Life Insurance (Insurance policies, etc.)
19 Safe Deposit: Title to Mrs. 39 Months’s auto, DD214, NY and KY marriage certificate, letter of last instructions, copy of will, personal property inventory, negatives of personal property, passports, old passports, Mrs. 39 Months’s birth certificate, Mr. 39 Months’s birth certificate, Mr. 39 Months’s SS card)

So what do I have left?

1 Letter of Last Instructions
2 latest credit report
3 Updated list of personal property
4 Pictures of personal property
5 Guarantees & warranties (appliances, cars, etc.)
6 Auto Info: Insurance coverage, policies, auto registration, repair/maintenance records
7 Instruction letter (where to find everything, computer passwords, etc.)
8 Setup dates for regular updates to the files (so I never have to do this again)

 

Some of these I should be able to knock off. The pictures of personal property actually might end up being a video (room by room) and description. Often these are better than just pictures.

The big killer, for me and for most people, is the Letter of Last Instruction. Let’s face it, its not a fun document, as it lists what happens when you die (not “if you die” but when – we haven’t discovered immortality yet). I’ve done some research on things to include:

  • Instructions about the funeral, memorial service, and preferred disposition of the body. Your loved one should also include any specific instructions for clergy and funeral directors.
  • Location of his or her will.
  • Names of friends and relatives who should be informed of the death.
  • Location of all important personal documents (birth or baptismal certificate, Social Security card, marriage or divorce papers, naturalization and citizenship papers, discharge papers from the armed services).
  • Location of membership certificates to any lodges or fraternal organizations that provide death or cemetery benefits.
  • Information about outstanding debts.
  • Location of safe deposit boxes and keys.
  • List and location of insurance policies. This should include the name of the insured, policy number, amount, company, and beneficiary for each life, health, accident, and burial insurance policy.
  • List of pension systems that may provide death benefits; e.g, Social Security, Veterans Affairs, railroad retirement.
  • List and locatoin of all bank accounts (checking and savings), stocks, bonds, real estate, and other major property (personal and business).
  • List of the names of various advisors, their addresses, and telephone numbers (lawyer, executor of the estate, life insurance agent, accountant, investment counselor).
  • Instructions concerning business operations, if any.
  • An explanation of actions taken in his or her will, such as disinheritances.
  • Personal information: full name, address and length of residence there; Social Security number; date and place of birth; father’s name and mother’s maiden name; marital status; names and addresses of children, spouse, and other members of the immediate family; schools or colleges attended and degrees and honors received; name of employer and position held.

I will probably start working on this in August, with the hope of having it done by the end of September. Wish me luck!

 

Mr. 39 months.

 

 

 

 

 

Updated personal files/disaster files

It is halfway through the year, and one of the things I wanted to work on was my personal files, or as ESI money often refers to them as, my Disaster files. We all keep records, either online or in paper form in a file cabinet. The key is to keep them organized in such a way that you (or your significant other) can quickly get the information that you need.

Typically, folks deal with these things when they first get the “setting up” bug, then let them lie for a significant period of time (sometimes years). I am very guilty of this, and the last time I updated them was back in 2013.

So as part of my mid-year review (and with the opportunity for a 4-day weekend for July 4th in the US), I took the time to dig in and see what I needed to work on. For everyone’s help, I’ve attached two pdf’s to this that I used when I was first setting up back in the 90s.

  • Something written for military personnel to show a file setup situation, by Lt. Cmdr. T. Connors
  • Something provided by USAA (the military insurance Co) for organizing records.

I hope they help everyone.

After going through, here were the deficiencies/tasks that I see I need to work on in the next 30 days to get myself back up to speed.

No Description
1 Update Master List from 2013
2 Send Master list to Mrs. 39 months
3 Price out updating wills – don’t need to update, no change from 2003
4 Redo filing cabinet with Master List & Disaster file #1
5 Letter of Last Instructions
6 Household budget folder (budget goals, income statement, balance sheet, income/expense forecasts)
7 Housing Information (Title, insurance, receipts for work, property taxes)
8 Online passwords
9 Location of keys to safe deposit box
10 Credit records: Resolution of past debts (auto, home)
11 latest credit report
12 Home Insurance Policy
13 Net Worth’s 2009 to present
14 Annual updates for Jan 1, 2017 into investments
15 Updated list of personal property
16 Pictures of personal property
17 Investments (list of accounts, goal planning, annual balance sheet)
18 Taxes: Tax records for previous year, current year documents
19 Guarantees & warranties (appliances, cars, etc.)
20 Personal background info (Education, personal history, resume)
21 Credit: Resolution papers of past debts, credit card names, numbers & 1-800 number
22 Auto Info: Insurance coverage, policies, auto registration, repair/maintenance records
23 Health insurance (Booklet from work, health history, medications, etc.)
24 Life Insurance (Insurance policies, etc.)
25 Safe Deposit: Title to auto, DD214, marriage certificate, letter of last instructions, copy of will, personal property inventory, zip disk with photos of personal property, passport)
26 Instruction letter (where to find everything, computer passwords, etc.)
27 Setup dates for regular updates to the files (so I never have to do this again)

Ouch. I have a lot of work ahead of me. Still, it will be good to have this done, especially as I progress towards financial independence.

Good luck with your mundane tasks.

Setting up your personal record file

Master List

Mr. 39 months

Final Ratios

The final ratios I want to discuss are Savings ratios and Growth ratios

 

Savings Ratios

 

You can use current income to pay for current consumption or to pay off past debts . The other option is to purchase assets that grow and create wealth – wealth that will provide financial security. This wealth is acquired by deferring current consumption and diverting income into long-term investments. The savings ratios measure the amount being saved and invested.

 

The first one is investment assets-to-net worth ratio = investment assets / total net worth (both items from net worth sheet).

 

This tracks increases of income and wealth producing assets. Many people have a significant amount of their net worth tied up in their personal homes (and when that value drops like in 2008, it can be catastrophic). This ratio helps to show improvement in non-real estate assets.

 

Based on our previous statements, the ratio would be $165,000 (investment assets) / $298,700 (total net worth) = 55.2%. This ratio should increase over time as you close in on retirement

 

The second savings ratio you should track is the savings-to-income ratio. It is a simple one, and its purpose is to determine the percentage of your income you save each year. You gain the data from your cash flow statement.

 

Based on the previous statements, the ratio for the previous documents would be $13,500 / $79,100 = 17% of their income, which is good for normal folks. However, for FIRE people, the percentage is a little low – most FIRE folks shoot for 30% – 50% or more. The ratio of savings you need to perform is based on your overall financial goals.

 

Note that this ratio should increase over time, especially as you pay off debts and the mortgage. Don’t just take pay increases and increase your lifestyle – always take some (or all) of it and put it aside into savings.

 

Real Growth Ratios

 

Inflation is the killer of savings, slowly bleeding your savings down until you have nothing left. If inflation is 3%, the price of a product will double in 24 years. How do you deal with this?

 

You save enough and invest correctly, so your money grows faster than the rate of inflation. You should use the growth of Net worth ratio to make sure you are keeping up with inflation.

 

Growth of Net Worth Ratio =[(Net worth this year – New worth last year) / Net Worth last year] – inflation rate

Example: [( 298,700 – 275,000) / 275,000] – .03 (inflation rate) = 0.056 or 5.6% Net Worth growth.

 

Then once you retire, you follow the 4% rule, adjust for inflation, and enjoy the good times!

 

Think of your financial ratios as a report from your annual financial health checkup!

First two financial ratios

In my last post, I wrote about the two basic financial reports, net worth and cash flow. These are the building blocks for understanding your current (and potentially future) financial status.

 

The next things to consider are important ratios, where you compare key parts of the main two reports to determine specific financial status. Like Net Worth, ratios are static “snapshots” of current financial status. The important thing with ratios is to track them over time, and see if you are improving your financial situation.

 

Liquidity

 

Liquidity is a measure of the speed at which an asset can be converted into cash without loss of value. Cash, savings, checking and money markets can be quickly turned into cash. Stocks and Bonds (and real assets like gold, real estate, etc.) are more difficult to turn into cash at short notice.

 

Most people require a little bit of liquidity in order to survive (purchase food, pay bills, etc.). The key is to keep your liquidity in line with your other financial goals, and to keep your liquid assets as low as possible (while still being able to sleep at night).

 

The basic liquidity ratio is:

Liquidity Ratio = liquid monetary assets (from balance sheet) / average monthly expenses (from cash flow statement)

 

Liquid assets: Cash, checking, money market accounts, and savings

Two months recommended

 

From our previous post, the individual has a liquidity ratio of $22,200 (from Net worth) / $6,414.58 (annual expenses divided by 12) = 3.46 months for liquidity.

 

If your income is steady and your job secure, with predictable expenses, you probably don’t need much more than 2x your expenses in liquid assets. Many financial advisors (like Dave Ramsey) recommend building up this “emergency fund” to as much as 6 months. Some folks (like Mrs. 39 months) like it as high as 12+ months.

 

Debt Ratios

 

The purpose of debt ratios is to determine the amount of financial leverage you currently use, and to track as you (hopefully) improve. The objective is obviously to become debt-free, especially if you want to be financially independent. The debt-to-asset ratio is very useful for tracking progress.

 

The data source is entirely the balance sheet. Debt-to-asset ratio = total debt / total assets.

From our example last post, $96,500 Debt / 335,300 Assets = 0.288

 

Another Debt ratio that is good to track is the Debt-to-Gross income ratio, which is the total debt payments / annual take home pay (pay after taxes, medical, etc.). It is used to help determine your ability to pay the debts off.

 

The source of the data is the cash flow statement.

From our example last post, $$11,400 (mortgage & debt payments) / $45,925 (total take home pay) = 0.248 or 24.8%. This is pretty good, as you should never take on debt payments (including student loans) of over 36% of salary.  Another recommendation is not to take on housing costs (mortgage or rent) of more than 28% of salary.

 

For my next post, I’ll talk about Savings Ratios and Real Growth rate ratios.

 

Mr. 39 Months

Basic Financial Documents

Basic Financial Documents

 

I was going to start some postings on basic finance documents and ratios, for a FIRE reader to use to start tracking their performance and see how they are doing over time. The key with all of these is that they are “snapshots” in time, which give you a single image. You have to rack them, over time, to see how you are doing.

 

Comparing yourself to others is madness (and is the heart of the “keeping up with the Joneses” spending which has caused so many issues in the current culture.

 

Instead, track yourself, and see yourself improving. By doing that, you can see your improvement over time. That should provide motivation enough to keep moving forward.

 

Net Worth

  1. Assets: Items you own. Don’t get too complicated here, because you will have to maintain it regularly. Keep it as simple as possible
    1. Liquid assets (cash, checking, savings, money market)
    2. Investments (stocks, bonds, real estate, etc.)
    3. Personal assets (home, cars, property, etc.) – be very realistic here. They aren’t very liquid, so difficult to generate cash from them
  2. Liabilities: Debts or amounts that you owe
    1. Short-term: pay off in next 12 months (credit card, utility bills, etc.)
    2. Long-term: payoff that requires more than 12 months (auto loans, mortgages, student loans, etc.)
  3. Net worth:

Net Worth = Assets – Liabilities

 

Here is a sample Net worth Statement (not mine)

Assets Total
Financial Assets
Cash $200
Checking $3,000
Money Market Accounts $7,000
Savings $6,000
Certificates of Deposit $6,000
Total financial Assets $22,200
Personal Assets
Clothing $12,000
Furnishings $15,000
Auto $20,000
Home $150,000
Other $1,100
Total personal assets $198,100
Investments
Stocks $0
Bonds $0
Mutual Funds $25,000
Retirement Plans (401K, IRA) $90,000
Life Insurance Cash Values $0
Real Estate $0
total Investments $115,000
 
TOTAL ASSETS $335,300
Liabilities
Short Term
Utilities ($500)
Credit Card ($2,000)
Other $0
total short-term debt ($2,500)
Long Term
Auto Loans ($3,000)
Student Loans ($15,000)
Home Mortgage ($76,000)
Other $0
Total Long-term debt ($94,000)
TOTAL LIABILITIES ($96,500)
NET WORTH
Total Assets $335,300
Total Liabilities ($96,500)
Net Worth $238,800

 

The Net Worth is a snapshot in a period of time (I take mine on Jan 1 of each year). You should track it at regular intervals. Your Goal is to increase your net worth to achieve a desired degree of financial security, and to eventually be able Financially Independent.

 

 

Cash Flow Statement

 

The Balance Sheet lists values for a single point in time. Your Cash Flow statement will show activity over a period of time, like a year. It has two sections – sources of income and expenses. Sources include any activity that produces cash for you to spend. Expenses list your expenditures (mortgage/rent, food, auto loan, insurance, etc.)

 

It’s helpful to divide the expenses into two categories – fixed and variable. Fixed are often non-negotiable (mortgage, insurance, etc.) while variable expenses are often under your control (dining out, vacations, etc.). Note that developing the cash flow statement can be difficult for many, as tracking your expenses at first seems to be a monumental task. Start with a shorter time frame (a month, or a week) and build from there.

 

Cash Flow

  1. Income: Includes all sources of cash
    1. Wages
    2. Pensions
    3. Investment income
    4. Cash gifts received
    5. Loans
  2. Expenses
    1. Payroll deductions (taxes, health insurance, Social Security, 401K, etc.)
    2. Fixed Expenses (mortgage payments, loan payments, utility bills, property taxes, etc.)
    3. Variable Expenses (Food, dining out, clothing, gifts, etc.)
  3. Cash Flow

Cash Flow = Income – Expenses

 

 

Here is a sample Cash Flow Statement (not mine)

CASH FLOW STATEMENT
Sources of Cash
Wage/Salary $77,000
Interest $900
Investment Distributions $1,200
Total Sources $79,100
Payroll Deductions
Federal Income Tax ($14,000)
Social Security Tax ($5,775)
State Income tax ($3,500)
Medical Insurance Premium ($2,400)
401K plans ($7,500)
Total Payroll Deductions ($33,175)
Fixed Expenses
Mortgage ($7,800)
Loan Payments ($3,600)
Utilities ($5,000)
Insurance ($3,000)
Property Taxes ($3,000)
Investment plans ($6,000)
Total Fixed Expenses ($28,400)
Variable Expenses
Charitable contributions ($2,400)
Clothing ($3,000)
Education $0
Food ($5,000)
Gifts ($2,000)
Travel/Vacation ($3,000)
Total Variable Expenses ($15,400)
CASH FLOW
Total Sources of Cash $79,100
Total Expenses ($76,975)
Cash Flow $2,125

 

Again, keep your cash flow records as simple as possible. Excessively detailed records require more maintenance, increasing the chance that you will get tired of updating the information. It is better to have a simple statement that you update regularly than a complicated tracking system.

 

Your first cash flow statement is often the most difficult to develop. As you do more, you will find it easier because you have a starting point to go off of.

 

Understanding your cash income and your expenses is a critical step to taking control of your finances. From here, you can make plans, determine tradeoffs, and make educated guesses on where to add and where to cut back. This will enable you to focus your expenditures toward your financial priorities.