Net worth is the ultimate indicator of financial success.  If you monitor it and maintain a target growth rate goal, you will really make progress.  Net worth is calculated by taking all of your assets and subtracting all of your liabilities.  The answer is what you are worth. 

As children we have $0 net worth, as we attempt to establish ourselves we purchase necessities and creature comforts to validate our adulthood and independence.  At this point our net worth falls to a negative number.  At one point we should turn our focus on  building our negative net worth until one day we are Thousandaires!  

Let’s say you are 26 years old and adding all that you own and subtracting all that you owe, you find your net worth at -$25,000.  You bought a car for $20,000 by putting $2,000 down, but one minute later the value of the car is $16,000.  So even on what you thought was a new asset is actually a $2,000 liability.  Once you start to consider asset appreciation and liability depreciation, you are in a better mindset to make wise financial decisions.  You will start to think of each purchase as a help (asset that appreciates in value) versus a hindrance (liability that depreciates in value).  You’ll eventually start to look at the Utility value of purchases and determine what true value will it bring to your life and is it adequately priced.

-$25,000 is okay. It’s a starting point and at least you know where you are and you are looking forward. So set a goal of growing your net worth by 10% per year (adjust this % goal per your preference). So next year you need to make decisions that will bring your net worth to -$22,500. See, you are headed in the right direction. Play with the numbers so that your goal makes you a $100-thousandaire at a reasonable age. 

Now keeping positive growth year over year is difficult given fluctuations in the market and the change in value of your assets.   So you want to shoot for an average annual growth of 10%.  So every five years you take the last five years of growth (and declines), add those annual percentages up, and then divide the sum by 5.  This will give you an average growth rate. 

Remember: Spend less, Invest more

In many developing countries they believe in having many children to work the fields as well as provide for the parents in their elder years.  Our western, industrialized country has Social security and retirement plans that reduce elders reliance on their adult offspring for support.  Yet as many of us know, this is not always the case.  Many Americans work all of their lives somewhere within the middle class, but due to a lack of planning or financial wherewithal, retire poor and die broke. 

Many of us are stuck between two dependent generations.  As we strive to do better than our parents and take a leap that we hope they support and encourage, we have to balance providing for our children as well as our elders all while trying to accumulate a comfortable life for ourselves.   

Siblings often fight over who will and can do what is needed to support their aging parents.  This is a very emotional situation that can really strain relations between all involved.  If you have the means and the insight to break this cycle that has haunted us since slavery, you may be expected by family members to do more simply because you can do more.  The ability is a great thing to have, but parting with hard earned cash is such sweet sorrow.  Especially when you are one of 5 siblings and you have to come up with most of the financial assistance. 

The cost of healthcare and medications can choke people with substantial resources.  As pharmaceutical companies continue to develop the next fix with no cures in sight, this problem will continue to grow.  No matter how well we plan, it may be inconceivable that our drug expense will be our second highest expense.

Personally, as the only son of my mother, as well as being a financial advisor with relatively good health practices, it was extremely frustrating to watch my mother ignore my financial advice while she earned a well above average income.  It was extremely frustrating for me to watch her health slip as she made no effort to improve her health consciousness.  Please forgive my reluctance to support her $50 per month cigarette habit.   I would not poison myself, why contribute to poisoning her? 

My friends that come from wealthy families have a different concern. They worry about getting gifts and support from their well off parents to subsidize the lifestyle they are accustom to.  They are less concerned with supporting their parents and more concerned with their parents not spending all of their wealth before they die.  Siblings fighting over dads’ estate is an even bigger fight.  If I had to chose between the two evils, I’d rather my kids fight over my estate rather than who is going to buy dads next box of Depends and Ensure.  But all of my money, if any is left, will be going into a Trust for my great-grand children’s college fund. 

The moral of this story is to manage your money properly so that you don’t turn into a burden on your adult children as they try to provide for their families.  By the time the baby boomers get through with Social security, it’ll be all up to your personal savings account.

Rent/Mortgage

Transpiration

Utilities

Revolving debt (credit cards)

Installment loans (student loans, etc.)

Entertainment

Insurances

Emergency savings

Vacation/Holiday savings

Retirement savings

Any other ancillary accounts

Once you know all that categories and the percentages you can start to devise a plan of action that will represent a better percentage mix.  For example, If you spend too much on entertainment like most of us do, you may want to hold two checking accounts and at least one savings account.  The first checking account will hold all of your funds for automatic bill payment.  The second account will hold your entertainment money for the month.  So you may have your employer direct deposit, say $300 per month into the second account.  Once that money is gone, its hamburger helper and brown paper bag lunch for you for the rest of the month.  A goal may be to reduce your monthly entertainment expense by $25 per month until you hit a reasonable amount.  You can brainstorm on less expensive forms of entertainment and hobbies to usher in a more responsible lifestyle that gels with your long term goals.

With a realistic forecast of your income growth (4 to 7% on average) you can develop an annual pie chart that incorporates your goals.  For example, you may find that between your company sponsored 401(k) and your Individual Retirement Account (IRA), you save 3% of your income for retirement.  One of your retirement saving goals may be to increase your percentage savings by 1% annually, or increase it by 2% annually until you are saving 10%. 

If your goal is to purchase a home within the next 5 years, you may want to start a down payment fund which should be at the very least the difference between your current rent and the projected mortgage payment of your ideal home (plus taxes, insurance, maintenance cost).  If you can’t afford to save for a home, you will not be able to maintain a home once you purchase it.  That is vital information to have prior to getting in over your head.

If you currently own a home or have substantial installment loans with compound interest, you may want to pay 52% to 56% of the bill every payday.  If you get paid every two weeks as opposed to on the 1^st and 15^th, you actually will make the equivalent of 13 payments per month by sending half a payment on every pay day.  Once you get a month or more ahead of your mortgage note, that could be viewed as an emergency fund if you really need to forego a payment in the future.  Ask your mortgage lender if they accept early partial payments. 

I pay all of my other interest baring installment loans, such as student loans every two weeks.  Not only do I pay 53% every pay period, but I also save on accruing interest.  By sending funds early there is less outstanding principal for them to charge me interest on. So in essence I end up only paying much less interest then the bank expected over the course of the loan.  The object of the leverage game is to pay as little in interest over the course of your lifetime.

Why save $3,000 in a savings account at 2% interest, while being charged 7% interest on an outstanding debt?  With the exception of liquid accessible cash, there is little benefit to not getting ahead of those interest baring debts.

This is where the sacrifice comes into play for those who build financial security.  This sacrifice is what makes them due the benefits.  The people who lack financial self-discipline are not safe. 

The definition of interest is ‘the cost of money’. If you carry $20,000 in credit card debt, you may end up paying an amount of interest on that debt equal to college tuition. So when your son needs college funds you won’t have it, but the CEO of Citibank will use your interest payments to pay for his son’s college education. But don’t worry, there is a chance that his son will be the boss of your son and hence your son will learn from that ivy league education indirectly.   Oh yeah, Citibank gives student loans.

If you are one who loves a good sale at Macy’s and you run to the mall to save 20% and then turn around and purchase on a credit card that charges you 20%, guess what… If you take two years to pay off that card, you will pay up to 20% more than the regular sale price. 

For every income there is an optimal amount of credit card debt that should be held. This limit depends on many factors in your overall financial strategy, but without a strategy you can have as much in credit debt as you want because collapse is eminent without a strategy.

I divide credit into three different categories: revolving credit, installment loans and collateralized debt (real estate). But the below is in regards to managing credit card debt.

In managing credit cards, on an excel spreadsheet list:
In column 1 – All your credit cards
In column 2 – List the interest rate charged
In column 3 – List your total credit limit
In column 4 – List the outstanding balance
In column 5 – Place a formula that will divide the outstanding by the total credit limit.
In columns 3 & 4 – At the bottom add the formula to sum these respective columns

Generally your goal should be to work towards all of the following:

1. Take the sum from column 4 and divide it by the sum of column 3 – If this number is greater than 50% then you either don’t have enough credit limits or you have too much outstanding balance. Work towards lowering this number as much as possible.
2. On column 5, work towards only using a maximum of 50% of all credit limits on each card. Once your used limit is over 50% it affects your credit score negatively. As well this extra unused credit may be used in an emergency, in addition to the 3 months (5 months if you are a homeowner) of liquid emergency savings.  Credit card companies have been lowering limits during this economic crisis. One of my clients limit was cut below his outstanding balance. We had to fight the credit card company to waive the over the limit fee they had the nerve to charge.
3. Only carry one card with you at all times. Choose the one with the lowest interest rate.
4. I highly recommend not using any department store credit cards. Never cancel a current card unless it has an annual fee. But have the discipline to not ever use the ones that insult your financial sensibilities with a high interest rate.
5. THE MOST IMPORTANT MONEY SAVING TIP IS TO Only pay the minimum payment on all credit cards, except for the one card with the highest interest rate. Pay as much on that one as possible each month.

One big surprise that we have awaiting us as we enter adulthood is about all that stuff or parents, teachers and counselors were spewing.  If you don’t perform well and take school seriously you will be greatly handicapped in your incomability (a term that I coined) throughout your life. 

As I consult people I encourage them to get their children involved in the financial learning process with them.  Children should understand the value of saving.  An example is if you give your child a weekly allowance of $10, one great idea is to tell them that they can’t spend it until the next week.  So if they spend $3 and have $7 left, you will only give them $7.  This will teach them the concept of spending restraint.  If they start to build up a savings and have $30 saved, then you may have to match that with $30.  If the amount of money is great enough you can take them to the bank and start a savings account in their name.  You can also encourage them to place their own money in the offering basket at church or give a portion of their savings to feed the homeless during the holiday.  I ask my children how much they want to give and leave it totally up to them. You can have them buy things for themselves that you were going to buy for them anyway, such as gifts to the family during Christmas or birthdays.         

 I advise teens on how being financially comfortable starts as a child.  How seriously they take school is a strong indicator of lifetime earnings. Acting and rap careers are great, but if you watch closely at those who excel in those industries, the one’s at the top are of a higher intellect.  College or not, Jay Z and Will Smith will never be called stupid.

Maybe college doesn’t make kids smart, maybe smart kids choose to go to college.  Some people are not designed for college, but to find two or three goals and pursuing them all while cutting out TV or Video games is always a good idea.  I’ve never met, but I’ve heard of parents that don’t encourage education.  I believe that some people have been beaten down by life and suffered academically that they feel as if success is not possible or possibly don’t want their children to be greater than them and in turn think less of their parents in years to come.  People get so intimidated and envious of “uppity” people that they’d rather not give that opportunity to their children.  That has to be the saddest situation imaginable outside of abuse.     

There are many illegal or morally questionable ways to make the money you need to substantiate the lifestyle that you require.  But remember not to sell your soul to the devil for the same stuff that you can get honestly with a few extra years of hard/smart work.  The more honestly you make money, the longer it will last and the more you will enjoy it.  But I’m not judging, make your money Boo.

Understand the difference between a want and a need. You need a car, you want BMW. Your son may need college tuition; the extra $100 per month that you save on forgoing your BMW dream for another 5 years could be redirected into a college savings fund. In America the priority is to make money. Everyone around you wants your money. Every commercial is to get your money. We must understand that our wallets are under constant attack. The objective of marketing firms and advertising agencies is to make you think you want or need their product so you can validate yourself. Don’t fall for the hype.

Have a Balanced value system. Learn to indulge in the qualities of life to a reasonable extent. Know how to value and appreciate the lifestyle that says, “I can buy that car, that purse and that suit, but I find great comfort in having a fat bank account more than a luxury automobile, a posh this or a trendy that. Delay your wants for another period in your life. Don’t try to live outside your means because the Jones’ got a new car, or you need additional validation of your manhood or worth. What percentage of your monthly income should go towards transportation, 10%, 25%, maybe 40%?

If you’ve already settled for being a slave, at least be a smart slave.  Each day this week I will publish a personal finance tip.  I will cover the basic principals that I preach to all of my personal finance clients.  I’m not sure if this information is going to be Earth moving for you, as I don’t know what level of financial sophistication you may be, but I’m sure we’ve all heard most of it.  Hence, my reluctance to publish this topic before.  The difficult part is maintaining the discipline to stick to a sound strategy.

We need to understand just as we were relentless in the game of monopoly as a kid, we need to strategize and have a plan of execution in order to master our adult game of monopoly. For those of us who don’t know the definition of the word ‘monopoly’ other than the board game, I’d advise you look it up and understand its impact on your life right now. 

Everyone and every company is out to make money.  This is why we get out of a warm bed in our comfortable homes each morning at 5am.  We began our paper chase so that we can maintain a warm bed and a comfortable home.  Okay it’s 5pm, you dart to your car after earning another $143 after deductions.  A whole week of work and the car you are jumping into is paid for the month.   What a vicious hustle of chase thy tail.  Five tips to catching your tail to follow.

Let’s start with having a bank account. I still to this day meet people everyday that don’t believe in our banking system. I can understand their frustration, with the talks about banks failing, Madoff, and any other scare tactic used against our modernized banking system, I may be scared too! Say you had $10,000 in IndyMac Savings Bank. What did it mean when the bank failed? Well to you, it meant absolutely nothing! Banks have Federal Depositors Insurance and the Federal Government insures your deposits up to $100,000. Recently this amount was temporarily increased to $250,000 ! So as long as you keep less than that amount, then the bank can go out of business, but your money is still safe! I encourage you to look up www.fdic.gov for more information about FDIC Insurance.

On the other hand what if you had the $10,000 in a coffee can in your pantry. What if your house or apartment that had an electrical fire. As rare as it may seem, I have known it to happen! What happens to your $10,000 then?

Research the local banks in your area. A lot of banks have accounts which are free to utilize as long as you follow their deposit and withdrawal rules. Unless you are a hundred-thousandaire, then you shouldn’t have much to worry about. Protect what you can’t afford to lose!

The other thing to consider when protecting and building your net worth insurance. Yes, I said the dirty word, I will say it again – Insurance. Medical, dental, disability, long term care, life, auto, home-owners, umbrella and rental insurance policies all have a place in our lives. They are here for one reason and one reason only, Chris Rock said it best: “it’s not insurance, it’s in-case-shit-happens!”

On a personal note, in 2002 I purchased a new car because my old one literally died. When I purchased the car my auto insurance nearly doubled in cost. So I called my insurance company to discuss my options for lowering the premium. At the time I lived in Texas, a state where Uninsured Motorists coverage is not required. I reduced my auto coverage to the most bear-minimum policy which lacked Uninsured-Motorists coverage. Can you guess what happened? Yes, my car was totalled by an uninsured driver! Who wound up paying for the damage to my vehicle? Me! It cost me nearly $7,000 for a $60 a month reduction in premium. Not a smart move.

Not all insurance is good. People can be just as over-insured as they can be under-insured. But I can tell you which side I would rather be on!

So, pull out all of the policies you have, make a list of the ones you don’t have, and ask yourself some questions. Is it worth taking the risk of losing whatever I am insuring? Can I afford the risk of not protecting my assets? The one that is most grossly under served is disability. Typically most people can restructure their home and auto policies to more closely reflect their risks and save money. I can’t tell you how many people I meet that pay for collision insurance on a car worth less than $2,000. Would you pay a $500 deductible to fix a car that has $1,000 worth of damage if it is only worth $2,000? Maybe you would, but probably not. You may be able to save $300-$700 per year in insurance premiums by not having the collision coverage.

As you analyze your assets and asset protection, remember there are always (and only) three aspects to an insurance policy: Conditions, Benefits and Cost. As a consumer we can control two of these aspects, and the insurance company will control the third. Let’s say you want a $10,000,000 Life Insurance Policy, and you only want to pay $1 for it. In this situation you have chosen the Benefit and the Cost, therefore the Insurance Company determines the conditions. They give you the policy, but will only pay your beneficiary if you die from natural causes, on a Tuesday afternoon in the month of February. Those Conditions don’t seem to favorable do they?

So, it is a wise idea to select your benefit, then the conditions, and let the cost work itself out. If the cost is more than you are willing (or can) pay, then you have to make sacrifices on your benefits and/or conditions. In the end you will have a policy that protects what you want, pays in conditions that satisfy you, and you don’t feel remorse for paying for it.

Do not take this blog as a gospel, or a reason to go out and cancel your medical insurance plan. Use it as a guide to have a constructive conversation about your needs and wants.

 Let’s talk about it.  yohance.harrison@gmail.com