Where's My Trust Fund?

Ever since writing the post on calculating your net worth over the weekend, I’ve been thinking about whether one should always include or exclude car and house from the calculation.  My conclusion?  It depends.

Let me elaborate on why I included my house but not my car in my own calculation.  My car is over 5 years old and completely paid off.  Unless I was in the most dire of financial situations, I would not sell my car and do not like to think of it as part of my net worth.  This has not always been the case.  Five years ago my car was brand new and I still had a car payment.  I was in a job I hated, and hated is actually putting it mildly.  I had just spent almost all my money on business school, my condo, and my car, and I found myself in a job that was making me absolutely miserable.  It got to the point where I was seriously willing to sell my car so I could quit my job.  I had a small emergency fund at this point but I would have needed more cash to even consider making a job change.  In addition, my car was new and I still had a loan, so the monthly payments were a large expense that would have gone away if I sold my car.  More on that story later, but if I had been calculating my net worth at that time, I would have included my car.

Now about my condo, or what I often refer to as my house.  As I mentioned in my last post, this is not our ‘forever house’.  We absolutely love living here, but in the next couple of years we are going to need to sell our condo and get a house with more space.  Therefore, I do include our house in the calculation.  With housing prices down so much in the last couple of years, I use a very conservative estimate in this calculation.

So it comes down to a personal decision.  If you are calculating your net worth in the most classical sense of the term, include your house, car, jewels, and other smaller valuables in the asset category.  However, if you want a true sense of your financial standing, think about what you would be willing to sell, or any other unique situations you may have, when deciding what to include in your calculation.  Note: car loans and home mortgages are always included in the debt category.  No exceptions.

If you would like another example, I checked out a few other personal finance blogs that I read from time to time and found this.  Read this post for an example of someone who does not include his house in his net worth calculation.

Calculating your net worth is kind of like stepping on the scale, you may not always like what you see, but it something you should do at least once a year.  Along with tracking your spending, calculating your net worth is a first step in figuring out your financial health.  The formula for calculating your net worth is simple.

Net worth = Assets – Debts

I calculate my net worth in an spreadsheet in Google docs, this way it is easy to compare month to month or year to year.  However, you can also use a notebook or scrap of paper.

Assets

Start by listing all assets: checking accounts, savings accounts, investment accounts for both retirement and non-retirement, house, and any other assets.  I do not include cars and household items in my calculation because I like to be conservative and unless I was in a dire financial situation, I would not sell these assets.  I also have a hard time including our home in this calculation, especially as the real estate market continues to go down in value and I have less and less of an idea of what we could get for our home if we sold it tomorrow.   However, I do include it in my calculations.  If we were in  our ‘forever house’ I would probably not include it.  Does anyone else have thoughts on this issue?

Add up all your assets at the bottom of this list and you now have Total Assets.

Debts

Next list all your debts currently outstanding: credit card balance, mortgage, car loans, student loans, any other type of personal loan and so on.

Add up all your debts at the bottom of this list and you now have Total Debt.

Now calculating your net worth is easy.  Total Assets – Total Debt = Net Worth

In an ideal world, this is a positive number.  However, if you are young, have a lot of student loans, or do not have a lot of equity in your house, this number may be negative.  It also is more likely to be negative if you are not including your house as an asset but have your mortgage as a debt (the debt should always be included).  The most important thing is to have this number get larger, or less negative, over time.

I calculate my net worth at least twice a year, sometimes more.  I know some people calculate their net worth monthly as motivation to see it grow.  After calculating the first time and getting all the information in place, it is fairly easy to do on a regular basis.

My goal with this blog is to prove that you do not need to have a trust fund to live a life free of money worries.  In writing this blog, I hope to provide readers with the basics of personal finance that should be taught in school, but most people end up never learning or teach themselves.  Even if no one ever reads this blog, I am excited about the exercise of putting my thoughts and experiences into writing.

As I mentioned in my first post, I’ve often dreamed of being a personal finance professional for a day job.  In fact, I spent a fair amount of time looking into potential financial advisor jobs during my time in business school.  However, the sales aspect of many of these jobs has always scared me away.  Not only do you typically have to do a lot of sales to build up your book of business in many financial advisor roles, but then you need to spend your days selling products that I do not believe the average person needs.   In addition, many of these jobs are focused on high-net-worth clientele, and I would rather work with people who are working to build their net worth not just maintaining it.

In the interim, I have developed a career that suits me quite well.  However, I still have the desire to spend time educating people on personal finance.  If you spend some time on this site, I hope you leave inspired to take action in your own financial life, and that you find information presented in a way that does not leave you feeling as though you have just been given a masterful sales pitch.   Over time, I hope you will find yourself less stressed about your finances, and empowered with personal finance knowledge.

In case any of my readers would ever like to contact me, I can be reached at the following address:

notrustfund [at] gmail [dot] com

Before you can start getting your finances in order you need to track your spending.  This is a good first step whether you want to create a budget, get spending under control, or figure out the size of your emergency fund.  There are numerous ways to track spending ranging from an old notebook and paper to modern iPhone apps.  Regardless of strategy, the goal is the same.  Keep track of every single penny you spend for at least a month, and ideally 2-3 months.  Here are a few options:

Carry a notebook around a record everything you spend.  This is a great option if you are the only one spending money in your household.  I also find that tracking money in this way helps rein in spending as you must actually think about what you are spending before you lay out the money.  At the end of the month, make sure to add any automated monthly expenses such a gym memberships, or cell phone bills to the total.

Use google docs.  This strategy allows you to collaborate with others as google allows you to share document with other users.

Gather up all bank and credit card statements at the end of the month and tally where you have spent money over the past month.

There are other options such as Quicken and Mint.  I have never used these but have heard great things.

There is a key difference between tracking as you go and tracking after the fact.  If you have a sense that you are currently living within you means, a post-mortem analysis is a great option, and arguably easier than if you track on a day by day basis.  However, if you are spending beyond your means and really need to reign in your spending, a day by day record is really the way to go.  Nothing helps put an end to mindless spending like having to write everything down.

This exercise helps you to identify all the different line-items in your life: weekday lunch, parking, morning coffee, groceries, gym, and so on.  This information can then be used to determine a monthly budget, and whether your money is actually going where you would like it to go.

The first time I used this exercise was when I was just out of college and on a very tight budget.  Then, my primary goal was to keep my spending in line.  I tried this again right after getting married.  It was a great way to figure out where all our money was going, come up with a monthly budget, and provided motivation to make some changes in out lifestyle.  It was then that I realized how quickly parking and weekday lunches for two people can add up.  For me, the daily parking was worth the expense, but lunches were not, and we increase our efforts at bringing lunches from home on a daily basis.

Try this for a month or two and see what you discover.  Is it easier to pass on a morning muffin if you have to write it down in your log?  Are you shocked to see how much you spend eating out each month?  Having an itemized list of monthly spending is the initial stepping stone in analyzing your spending habits, curbing spending, creating a monthly budget, increasing spending, and creating an emergency fund.

I often say to my husband, jokingly, “Where’s My Trust Fund?”

When I think about how my life would change if I had a trust fund, I do not dream of fancy cars and lavish vacations.  While that all sounds amazing, it is the idea that, if I had a trust fund I would not have to stress about money or make career decisions based on financial needs that really gets me excited.  I realize that having a trust fund is probably not the road to Easy Street, and I am sure having vast sums of money comes with its own set of challenges.  However, from a financial worry and career perspective, I aspire to live my life as if I did actually have a trust fund.

As a disclaimer, I have no qualifications beyond my own life experience to prepare me to write publicly about personal finance.  But this is exactly why I want to write this blog.  I was an economics major in college, and am a Harvard Business School graduate, yet I have never had a personal finance class.  Granted, this is something that should be taught in high school at the latest.  But it bothers me that the vast majority of adults walking around have never been educated on how to handle personal finances.

Which brings me to another point, I am a personal finance junkie.  I love helping people with their finances.  Nothing makes me happier than when a friend calls to talk to me about budgeting, saving, or how to think about whether refinancing a mortgage makes sense.  My ‘dream job’, if you will, is to be a financial educator.  I would love nothing more than to spend my days helping people learn about how to manage their finances.  This blog brings me one step closer to living my life as if I do indeed have a trust fund.