If you don't know where you are, you're lost!

Once upon a time my wife became lost while driving home at night. She called me on her cell phone, demanding that I tell her how to get home. The first question I asked was, “Where are you?”

Her answer, “I don’t know. I’m lost.” I asked her to find a street sign. She was in an apartment parking lot and couldn’t see any street signs. I asked if there was anyone around. She saw a man parking his car. When she asked him where she was, we discovered that she was only one block away from the road home. A few minutes later she was safely on her way home in familiar territory.

Determining your present location is the first step in planning any journey. Take a minute to calculate your net worth. Add the value of all your assets. Subtract all your debts and consider the results. If your net worth is a negative number, don’t despair.

Consider this journey through this vale of tears we call life.

Fred graduates from college with $500 in his checking account, $20,000 in college debt, a car given to him by his parents valued at $4,000, and a $3,000 car stereo. I would ignore the car and the stereo equipment and calculate his net worth at -$19,500.

Time passes, now Fred is married. Fred and Ethyl have two children a mortgage, a late model minivan, and a beater Fred drives to work. They still owe $140,000 on the mortgage. They have $15,000 in principal payments and the initial down payment on the house. The wife’s minivan is worth about $16,000. The car Fred drives to work might be worth $1,000 on a good day. They have about $5,000 in the bank but they are also carrying about $5,000 in credit card debt. Fred also has about $10,000 in his 401K.

-$140,000 + $15,000 + $5,000 - $5,000 + $10,000 = -$135,000 net worth ignoring the cars

Fred and his wife are serious people. They do a good job raising their kids, paying off their debts, and saving for retirement. At age 55 they have paid off the mortgage (finally after 30 years!). They paid cash for their two current cars that are worth a total of about $25,000. Fred has about $500,000 in his 401K and another $50,000 in savings. He pays off his credit cards every month. The house is currently worth about $400,000.

$500,000 + $400,000 +$50,000 = $950,000 (Good grief! Fred is almost a millionaire.)

How did that happen? Of course the answer is one step at a time. I am afraid the increase in property value in this example might be a thing of the past, Fred should have more than $50,000 in savings by age 55, and he would be lucky to put away that much for retirement with two kids, but you get the idea.

On the first of every month, I do a quick calculation of my net worth. This might take 15 minutes. I then compare it to the total from the previous month. If it drops, I make certain I understand why. Each year, on New Year’s Day, I compare the old number with the new.

Just make certain you are heading in the right direction. Eventually, you will get where you want to go.