Personal Finance Audit
How to get your personal finances sorted has got to be one of the most boring blog posts I’ve ever done, but it’s one of the most important first steps for anyone and everyone to take. So we’re going to look at what you can and should do right now, before you worry about any other aspect of investing or finances.
It doesn’t matter if you’ve been investing for decades or if you’re brand new to all of this. Going through this process will have a huge benefit for you. Some of you will already be doing this, most won’t. Hopefully by the end of this, all of you will!
I’ve been doing a personal Net Worth Statement once a month, every month, since 2006. It’s sad I know, but it’s allowed me to keep on track to reaching the goals I set for myself. And notice when I’ve started to get lazy, greedy, and downright ridiculous – like that time I decided to buy a car worth 3x as much as the house I had just bought… oops
Net Worth Statement
Your entire financial life comes down to just Four Key Areas that make up your Personal Net Worth Statement. This is one of the oldest personal finance things out there, I’m not reinventing anything right now. It works and is incredibly powerful if you want to get from where you are now to somewhere else.
The point of this exercise is to know if you sold everything, cleared all your debt – how much money would you have? And at the end of the month, how much money will you have left over once you’ve lived your normal life?
If either number is negative, you’ve got some work to do!
What do you bring in each month?
Calculate what you’ve got coming in. Anything that puts money into your pocket each month or year.
What do you spend each month?
Calculate what you’ve got going out.
What do you own?
For the purposes of this, an asset is anything you own that has a real value if you needed to sell it. Don’t take the mick here, no need to put £0.50 for each CD you own.
Think more along the lines of stuff that you could sell for more than a decent chunk of change. That amount will vary depending on your circumstances.
What do you owe other people?
The most common liability people have is a mortgage. You owe a bank or building society a crap ton of money, and if you sell your house they will want that money back.
Car loans, personal loans, credit cards, pay day lenders, loan sharks, Granny who lent you some money, that bloke down the pub you owe a pint to, etc.
You get the idea.
The whole point of this exercise is to give you a snapshot of your current financial health. By tracking it over time, you can see what areas need more focus, and where you’re letting money slip through your fingers.
The reason we track these numbers is so we can see when it's time to adjust course, or when we need to focus on something specifically.
Without a road map, you're just aimlessly driving around in circles. Which, other than being fun to watch, isn't that helpful if you actually want to get somewhere.
Hopefully the key take-away for you is to just get started and going through this process. It’s not particularly fun, but it only takes about 10 minutes, so it’s worth the effort.
Using something like Moneyhub is a great way to shortcut the process as well, so I highly recommend signing up for that if you want the quick and easy way of doing it. You can track all four key areas using the app, and see at a glance how you’re doing. Alternatively, an excel sheet will be fine. Or if you’re like me, both!
So that’s it. It’s fairly straightforward once you get your head round it. By doing this once a month (recommended) / once a quarter / once a year – you’ll be able to watch where your money goes, and whether or not you’ve got a future of financial freedom, or a future of being broke and living pay cheque to pay cheque.
The aim of the game is to increase your Net Worth each month, and if it dips, to know exactly why and be able to confidently know whatever you spent the money on has been well spent – or at least really enjoyed.