## Saturday, April 20, 2013

### Are You Lost?

One dark evening I received a desperate tearful phone call from my wife. She told me she was lost. She couldn’t find her way home. I did what any husband would do is such a situation. I asked, “Tell me where you are?”

She replied, “I don’t know where I am. I’m lost.” Then she cried some more. The story had a happy outcome. My wife was in an apartment parking lot. She found a man who knew where she was located. Between the two of us we were able to quickly get my wife on the familiar road to our home.

If you are lost whether on an unfamiliar street on a dark night or in a financial mess the first step is calming your mind by asking the right questions about your internal condition. We covered those questions in Back to the Beginning.

Back to the Beginning

When you are ready, you must then ask the question, “Where am I?” In order to determine the right road to your destination you must first know your current location. In answering those questions about your financial situation, first calculate your net worth. I am going to ask you to perform that calculation using certain assumptions.

I will ask you to break your net worth into two components, liquid net worth and real estate net worth. For the purposes of this calculation consider any investment or debt that can be instantly valued to the penny and liquidated as a component to your liquid net worth.

For Example: Consider a Recent College Graduate

-\$ 1,000 Credit Card Debt
-\$20,000 Student Loan
-\$13,000 Car Note
+\$ 4,000 Credit Union Checking Account
+\$14,000 401K

Total Liquid Net Worth: -\$16,000

Our young graduate has a negative liquid net worth. If that is your situation, it isn’t all that unusual. It can be fixed.

Let us assume that the young person in our example also bought a small condo near her place of work. She received first time home buyer aid from her state, so she only had to make a 3% down payment. To calculate her real estate net worth she goes to Zillow for an estimate of her property’s current value. Then she calls the bank or looks at her spread sheet to determine how much she still owes on the mortgage.

Let’s say those amounts are:

\$90,000 Zillow Estimate
-\$85,000 Remaining Mortgage Balance

Total Real Estate Net Worth: +\$5,000

Our young graduate has determined her location, the first step in finding her way to finding financial independence. I recommend that you perform this calculation once a month, every month for the rest of your life. It is a very quick way to determine if what you are doing is producing the results you want. Even with multiple investment accounts, this only takes a few minutes every month. If your last name is Rockefeller and your concerns include large real estate developments and factory depreciation, you are excused. Your accounting staff and auditors will perform these calculations on a quarterly basis.

You may have noticed that I have not included the value of the car or any furniture this young lady might own as a component of her net worth. That car is worth something, maybe more or less than book value. She won’t really know what that car is worth until somebody writes her a check. Besides that, she needs the car to drive to work. It is a depreciating illiquid asset. If she decides to sell the car, then she can deposit the money in her checking account turning it into a liquid asset. The same logic could be applied to real estate, but with a little bit of luck and a lot of time real estate will be more likely to appreciate in value. This makes it an investment as well as an expense. Unless you are the owner a perfect low mileage Saturn Sky with the dealer installed turbo package or some similar rare fast car it is not an investment. It is purely an expense.

By the way, the next step is not the monthly budget.

Lost by David Wagoner:

Stand still. The trees ahead and bushes beside you
Are not lost. Wherever you are is called Here,
And you must treat it as a powerful stranger,
Must ask permission to know it and be known.
The forest breathes. Listen. It answers,
I have made this place around you,
If you leave it you may come back again, saying Here.
No two trees are the same to Raven.
No two branches are the same to Wren.
If what a tree or a bush does is lost on you,
You are surely lost. Stand still.
The forest knows where you are. You must let it find you.