“The Journey to a Thousand Miles Begins With the First Steps” – Lao-tzu
By now, you may have read several books and articles regarding financial independence and investing like Robert Kiyosaki’s Rich Dad Poor Dad or may have watched Aya Laraya’s Pesos and Senses from the Youtube.
You are now highly motivated and convinced that financial intelligence along with investing a certain percentage of your hard-earned money will help you alleviate your poor financial status and gain financial freedom in the long perspective. You are very persistent to join the bandwagon, yet when you check your current financial capabilities, you cannot even beef up your savings account due to current payables and budget constraints you have in your household.
Don’t be discouraged and feel frustrated, though. Accept this reality and begin your journey towards your goal of financial freedom. Besides, accepting this truth and deal with your current financial situation is your first step towards your journey of thousands of financial freedom miles.
Your First Step - Calculating Your Personal Net Worth
Have you tried to calculate your net worth before, even just for a mere fun?
I am not a billionaire like Henry Sy or Lucio Tan to bother calculating my personal net worth. I am just a mere Juan dela Cruz, you might say.
I insist you need to know your personal net worth if you are serious in your goal of investing. Like a voyager, this is your starting point, your benchmark as you begin and gain triumphs and experience failures during your journey towards financial independence.
Let’s get started.
The Balance Sheet
You might be familiar with the balance sheet. If you are employed with a certain business organization, it is the spreadsheet that you use to determine the financial condition of the business at any given period of time.
For the benefit of our discussion, we will use this spreadsheet to determine your personal financial condition and will call it the Personal Balance Sheet.
The Personal Balance Sheet has three main parts: Assets, Liabilities and Net Worth.
Assets is listed first along with its main categories according to liquidity.
Liabilities followed Assets. The difference between Assets and Liabilities is the individual’s Net Worth.
See Fig.1 below for reference.
Liabilities followed Assets. The difference between Assets and Liabilities is the individual’s Net Worth.
See Fig.1 below for reference.
Fig. 1 Example of a Personal Balance Sheet
Now, calculate your personal net worth using the Personal Balance Sheet in the above figure.
To get a realistic figure of your net worth, you must be honest in putting all the necessary figures in your Personal Balance Sheet. Remember that it is only you who knows and sees what will the figure reflects in your Net Worth.
A Net Worth that results in a negative figure, that is, your Total Liabilities is more than that of your Total Assets, means that you need to focus on reducing your debts first before you can start investing. Don’t worry though, as most successful billionaires have been buried deep down in debts once before they became successful investors.
If your net worth results in a positive figure, you are in a better position to start investing earlier through the different investment vehicles which I will discuss later in another article in this blog.
The purpose of this exercise is to know where your financial situation as of the moment. Now that your financial condition is clear, your focus now must be to grow more assets while reducing further your liabilities. More assets with lesser liabilities will mean higher personal net worth!
More power to your hard-earned Piso, Juan!
Download your Personal Balance Sheet Calculator Here!