Friday, November 1, 2013
It’s 10:00. Do You Know Where Your Children Are?
Back in the 1960s and 70s, every evening a serious announcer would ominously intone, “It’s 10:00. Do you know where your children are?” Back in those days some cities had curfews. It was illegal to be out roaming around after 10:00 if you were 18 or under. If the police found your child out on the street you could retrieve him at the local stationhouse-after paying the fine. If parents have minor children it is their responsibility to know the comings and goings of their progeny. Apply the same principle to your money. If you don’t know where your money is located or where it is heading, someone will grab it. Unfortunately, when dealing with banks or credit card companies, you have to pay the fine but you don’t get your money back. It is the first day of a new month. Absolutely, no exceptions unless you are rich enough that your accountants handle this task for you on a quarterly basis, calculate your liquid net worth. Do this every month for the rest of your life. There is no single action that can tell you more about your money in less time or with less effort. If you have a mortgage, handle that as a separate calculation. Once you have performed this task a couple of times, it shouldn’t take more that 20 minutes even if your financial situation is complicated by multiple credit card balances. Given the power of the Internet, the hardest part of this task is remembering all your passwords. Kind of like giving your kid a cell phone; now you have him on a first class electronic leash. First add up all your assets that can be converted to cash (bank accounts, money market funds, brokerage accounts, and retirement accounts). Then subtract all your debts except your mortgage. This would include credit cards, car notes, and unsecured loans. The sum of these numbers is your liquid net worth. Now compare these totals with last month’s numbers. This can be done in a spreadsheet or on a simple piece of paper. Since I am painfully old school, I keep these numbers in my Franklin Planner. If you don’t like what you see or you don’t understand what you see dig into the numbers. If you honest with yourself (and that is a big if) it won’t take long to figure out what is going on. If you really don’t know what happened to your money, track all your expenses to the penny for a month. Then you will know the truth. The formal budget is the gold standard of basic money management, but let’s save that lecture for another day. This month the balance in my primary working checking account dropped a couple of thousand. What happened? There was a foul up with my retirement annuity. I was told by the Navy that Maryland state taxes would be deducted as when I was drawing a regular paycheck. I found out by accident from OPM when changing my health care provider that nothing had been withheld for that purpose. A quick trip to my CPA for an estimated tax calculation and $2,400 later, problem solved. Since a number of my readers are Federal employees approaching retirement, this could be something you need to know. OPM does not withhold state income tax unless you specifically tell them how much to withhold. When I had a mortgage I kept my payment history on a spreadsheet. Every month I knew my exact remaining balance. I had a pretty good idea of what house in my neighborhood was worth, so: The Value of My Home – Remaining Mortgage Balance = Equity Add that number to your liquid net worth. Now you have your total net worth. Note: I don’t include cars or furniture in this calculation; neither should you. Consider that money fully expended on the day you buy the item. If you get anything back when you finally trade it in, you will be using that money to buy the next car. If you don’t know where you are, you are lost. If you aren’t already calculating your net worth on a monthly basis, start today.