The Modern Couple's Money Guide. Lesley-Anne Scorgie
Common statements include:
Bank statements
Mortgage statements/property value assessments
Investment statements (from your bank, your RRSP, TFSA, or non-registered accounts)
Credit card bills
Loan and line of credit statements
Pension statements
IOUs (a rundown, handwritten if necessary, of money you owe to friends or family or that they owe you)
Once you have gathered your statements, begin inputting this information into a net-worth tracking tool. Not into designing your own spreadsheet? No problem, use Patrick and Morgan’s Net-Worth Tracker (see opposite page) as a template. If you’re uncertain which category to put a statement balance in, simply ask yourself this question: Do I need to repay this money? If the answer is yes, that balance is a liability.
Pay stubs, utility bills, and invoices for income are excluded from your net-worth calculation. They are used when budgeting instead (see page 48). Liabilities are different from bills in that liabilities are borrowed funds that must be repaid. Bills are paid monthly for goods or services — like your Internet or cable television service — delivered to you in a certain time frame. Bills should not be carried forward, whereas many liabilities, such as car loans and mortgages, are set up as regular payments over the course of many months. When a credit card balance isn’t paid off every month, it becomes a liability rather than a regular monthly bill. (A budget tool can be used to track monthly bills and income. Budgets and tracking monthly expenses are discussed in chapter 3, Scrap Your Emotions and Sort Out Your Accounts, and chapter 4, Curb Overspending.) Assets, on the other hand, are owned by you and grow in value.
Tracking your net worth is a simple four-step process.
Step 1: Start by marking the date at the top of your spreadsheet.
Step 2: Record each asset or liability and its value.
Step 3: Add up your assets and liabilities.
Step 4: Subtract your total liabilities from your total assets, and voila — that’s your current net worth.
Let’s take Patrick and Morgan, both 45 years old, as an example. They own a home valued at $550,000 and have a mortgage of $315,000. Last year they did a renovation and financed it through a home equity line of credit, which has a balance of $40,000. Patrick has an RRSP through work and Morgan has a defined contribution pension plan through her employer. Patrick’s RRSP is valued at $60,000 and Morgan’s pension is worth $50,000. They have three children and a Registered Education Savings Plan (RESP) valued at $45,000. The couple struggles to pay off their credit card balances, which total $6,000 split evenly between two cards, every month. Patrick and Morgan’s current net worth tallies to $344,000 when their total liabilities are subtracted from their assets.
Sometimes people don’t have any assets or any liabilities. If that’s you, simply put “0” as the value in the applicable category. If you don’t know the exact value of an asset, like your home or a collector’s item, you’ll want to have an assessment done or do market research on comparable offerings. Sometimes your hard-copy bank or investment statements won’t have the exact current value of an asset either. Simply call the institution where your bank account or investments are held and inquire about the current balance or check online.
Now it’s your turn to try it. Work through your stack of financial statements one by one, placing the name and correct value in either the asset or liability column. As a reminder: your net-worth tracker is an entirely different tool from your budget. A net worth sums up your total assets and liabilities whereas a budget captures your monthly income and expenses.
How do you feel now that you know what your net worth is? A negative net worth isn’t ideal because it means you owe more than you own. When you owe money, your options are limited — you either pay the money back or your lenders will harass you until you do. If you don’t pay them back, your credit rating will be impacted in a negative way, making it harder for you to borrow money at affordable rates in the future. But don’t worry if you’re staring at a negative number. This book will show you how to increase your net worth and change that negative into a positive, which will allow you to have greater choices and flexibility with your future. However, when you have a positive net worth you can continue to build savings for retirement, start a business, put a down payment on a home, pay for your wedding, or invest in your education.
Where Should Our Net Worth Be?
Almost every week I get asked “What should our net worth be?” The answer just isn’t that simple, because it’s based on what your goals are for the future. If, for example, you came to me and said you wanted to live on a beach in Bali and sell T-shirts for the rest of your life, I would tell you that you would need much less than someone who wants to take luxury cruises, play golf in warm climates, and shop for expensive jewellery in retirement. The person heading to Bali may need only $100,000 to live comfortably for the rest of their life, whereas the person heading down luxury lane would need closer to $4 million.
However, as a general rule of thumb, the average 30- to 50-something Canadian household will need approximately $2 million for retirement. So if you work that back, starting at the age of 25, and assume that as you age you’ll make more and can afford to grow your net worth more aggressively through asset growth and debt reduction, you would need to reach the following net-worth milestones at these ages:
Okay, I know that these numbers seem downright massive! But there are a few things that will work in your favour and push you much closer to achieving these targets.
1 Compounded interest and reinvested returns: The most powerful asset you have is time. The more time you have to save and invest your money, the more it will grow through the power of compounded interest and reinvested returns. Compounded interest and reinvested returns mean that you earn interest and returns on your initial investment (the principal), which is then reinvested, allowing you to earn more interest and returns on it. So now you’re earning interest and returns on the existing interest and returns. The more time you have to allow compounded interest and reinvested returns to actually compound, the more money you’ll have in the end.Think of it as piling rocks at the top of a mountain. You push the pile over the side of the mountain. On their way down, your rocks hit more rocks, which hit even more rocks. Before you know it, your little pile of rocks has started a landslide. That’s how compounded interest and reinvested returns work: as time passes, your portfolio grows into something quite huge and all you needed to do was gather those initial rocks at the top of the mountain.The longer you wait to invest your money, however, the less powerful compounded interest and reinvested returns are. Why? Because the less time you have, the less opportunity you give compounded interest and reinvested returns to compound themselves. Time is the magic ingredient that grows your money.
2 Mortgage as a forced savings plan: More than likely you will own a home in your lifetime. The act of repaying a mortgage forces you to reduce your outstanding mortgage balance, thus pushing your net worth higher every month. The only reason this would not work in your favour is if you borrow back the equity — typically through a low-rate line of credit or consolidation loan — you’ve put toward your house. I’ll introduce the pros and cons of using lines of credit and consolidation loans in chapter 5 (see page 69).
3 Inching your way to debt freedom: Every month you will reduce your consumer debt (debt that isn’t your mortgage) as long as you don’t accumulate more. Again, this builds your net worth through regular debt repayment. When you become debt-free, your cash flow will improve dramatically, allowing you to put more money toward assets.
4 Automation: Would you believe me if I said that you can build your net worth with your eyes closed? It’s true. Through regular automatic contributions to your investment plans and the outstanding balances on your debts, including