Financial Checkup: Calculate your Net Worth and Cash Flow
Have you ever done your own financial checkup? Do you regularly calculate your net worth and cash flow? It’s a fairly simple exercise, but not something many people–especially Filipinos do.
As people, it’s fairly easy to associate someone’s monetary standing via the material things they own. However, just because they have a lot of material possessions and fancy stuff doesn’t mean they are rich. They could just be rich in debt.
Your net worth is not your annual income. The more one’s paycheck grows and the higher promotions you achieve, the more people become flippant with spending money they haven’t earned yet.
One of the most important steps in financial planning is knowing your own net worth and cash flow. The goal is to slowly work towards a positive net worth and cash flow: by paying off all debts and then acquiring more income-generating assets.
We must make sure we have more assets than liabilities, to have a positive net worth. If your liabilities overwhelm assets, then your net worth is negative.
If you’re nervous about knowing your real net worth and cash flow, then it’s all the more important to calculate it the soonest.
What’s your Net Worth?
Your net worth is a snapshot of your overall financial health at a fixed point of time. It’s a picture of where you stand financially.
You can calculate your net worth with a simple pen and paper. To calculate your net worth, use the fairly simple formula:
Total Assets – Total Liabilities = Total Net Worth
Your net worth is a measure of the things you own (assets) less the things you owe (liabilities).
| ASSETS | LIABILITIES |
|---|---|
| – Cash – Savings Accounts – Checking Accounts – Bonds – Stocks – Patents, Trademarks – Mutual Funds and Investment Funds – Household items, jewelry, art (anything of market value) – Properties (condos, home, property) – Vehicles (depreciating value) | – Mortgages – Student loans – Personal loans – Credit card debt – Other debt |
Once you determine your net worth, you can clearly see your weaknesses, which items are holding you back and which areas you should prioritize.
Net worth is not a static number, so it’s best to assess your net worth on a regular basis: maybe every month, or every quarter. As you track your net worth over time, you can see your progress you’re making toward getting out of debt and saving money.
Net worth provides a clear insight of how financially healthy you are, but it does not offer any information about your monthly income and expenditures. You will need to calculate your cash flow for that.
What’s your Cash Flow?
A cash flow statement is a summary of your income and expenses. A cash flow statement will give you a better understanding on the minimum amount of money you need to maintain a standard of living you’re comfortable with.
| INCOME | EXPENSES |
| – Main job – Part-time job – Freelance income – Business revenues – Rental income – Dividends / Interest – Tax refund – Cash gifts – Other | – Mortgage or rent payments – Loan payments – Auto payment – Insurance – Transportation (gasoline / commute) – Utility bills (electricity, internet, water, phone bill TV, Netflix) – Entertainment / leisure (dining out, gym) – Clothing – Other |
Cash flow determines your movement of money. Cash flow statements should be calculated every month.
Why do you need to do a Financial Checkup?
Simple reason: what is not measured is not managed. A lot will be revealed when you do this exercise. If you have more assets than liabilities, you are in a better position. However, if you owe more than you own, you will first need to focus on paying off debts and improving your financial health.
What if I’m Negative?
Don’t fret, it’s more common than you think. Many people have a negative net worth, mostly due to car, home mortgage, or student loans. I built this blog myself to change my life, challenge myself as I acquire more research and accountability in being serious about being more financially independent.
Prioritize in slowly work towards paying off debt by living within your means (Read Tips on How to Live Frugally)
You can slowly pay off your loans
Are You Financially Healthy?
While Net worth and Cash flow is a very nifty tool for evaluating your finances, please take note that it is not indicative of a person’s worth. You could have a multi-million net worth but still feel worthless, empty, and miserable. When going through this financial journey, look into your WHY first. When you align money with purpose, you will lead a meaningful life.
The primary goal to doing a DIY financial checkup is so you can understand your current status. The next step is to make your financial goals (SMART Goal Setting)
Doing a financial checkup does not guarantee wealth. It is good to know where you stand, and then you need to put in the work to making your dreams come true.
Feel free to browse through the resources for Step 1 of your Financial Guide. You can also look at our Foolproof 5-Step Financial Guide to help you from start to success.
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