LEVEL ONE / QUICK WINS
Lesson 2: Your Net Worth
As a CFP® professional, one of the first things I do with a new client is create a “Statement of Financial Position.” Just like a company produces a balance sheet, it is a very helpful exercise for an individual to list their assets and liabilities. In the next few minutes, I’ll provide some tips on creating and maintaining your personal balance sheet, so you can become the master of your money.
By the end of this lesson you'll have learned: 1) exactly where you stand financially, and 2) an easy way to track your progress so you can have financial freedom.
ELI5 – What is a statement of financial position?sh earning at least 4.30%?
ELI5 is reddit speak for “explain like I’m 5 yrs old.” Put simply, a statement of financial position lists everything you own and everything you owe. The result is your “net worth,” and hopefully is a positive number! Included are assets – things such as savings accounts, 401(k)s, a house, a car. Also included are liabilities – such as a mortgage, a car loan, student loans, or credit card debt. Subtract your liabilities from your assets and you are left with your net worth. It can be helpful to track your net worth over time to see if you are on-track to meet your financial goals.
What’s the best way to create a statement of financial position?
There are some excellent free tools out there to help you create your personal balance sheet. I’ve tried most of them and my two favorites are Mint.com and Personal Capital. Each is considered a “financial aggregator” and will require you to input your usernames and passwords for your accounts. Doing so will allow daily updates and alerts on your accounts. Personally I’m fine with providing these companies read-only access to my accounts, but if that thought scares you, a simple Excel sheet works just fine too. One thing I really like about Mint.com and Personal Capital is that you can put in your house address and your car make/model and it’ll use a third-party integration from Zillow and Edmunds to update their market values. Pretty slick!
Some other notes on these tools:
Both have excellent phone apps. I keep both installed on my phone and check them often. I have all my investment, credit card, and bank accounts aggregated so I only have to check one place to quickly check all my balances.
Both have budgeting tools. I’ve found Mint.com’s budgeting feature and spending categories to be superior.
Mint.com has a nice credit score feature too, which provides an update score based on Equifax data every 30 days. You need to input your SSN to access this feature of course.
Personal Capital gives excellent insight into your investments, including a breakdown of your asset allocation, investment fees, and they even plot your portfolio on the Efficient Frontier for all you fellow efficient market hypothesis geeks!
(Note that Personal Capital has very aggressive sales calls if you qualify for their investment management. After my repeated requests to be placed on their Do Not Call list were ignored, I ended up changing the phone number in my profile to Personal Capital’s toll-free number! (Just be sure to request a security code via email when signing in from a new device.) Despite their annoying sales calls I’ve found their app to be extremely helpful and well-worth signing up.)
Personal Capital generates revenue by upselling their investment management services. Their aggregation app is a great lead-generation source for the company. Mint.com makes money by recommending credit cards and investment products to qualified users via in-app ads and targeted emails. In fact, when I worked for FutureAdvisor we regularly ran advertising campaigns with Mint.com users and they were very successful because we were reaching users who were already comfortable with online financial management.
Other investment management and bank websites also have similar aggregation tools, such as USAA, Fidelity, and Schwab. I’ve found Mint.com and Personal Capital to be the best for me, but certainly use whichever one(s) work for you!
How often should I check my statement of financial position?
Behavioral finance experts have shown that frequent evaluation of your investment accounts correlates to poor performance because you increase your chance of observing a loss. (1) The frequency of which you should check or update your statement of financial position depends on how you are using the data. If you are using Mint.com to help adhere to a budget, it makes sense to log in several times per week. I check both apps several times per week because I have many credit cards and checking accounts and I find it’s easier to keep updated on my accounts by logging in to one place. However if you are strictly using the tools as an investment aggregator, it may be more sensible to check it once per quarter. If you check it more frequently, just be sure you are not making your investment decisions based on that information. An excellent book to learn more about this is Thinking Fast and Slow, by Daniel Kahneman.
FIRESIDE FABLE
I had just woken up and rolled over to my nightstand to grab my phone. I checked my Gmail and saw two emails from Mint.com alerting me to fees in one of my checking accounts. I remember being very surprised because none of my checking accounts charge monthly fees. Mint used the opportunity to quickly tell me “Consider one of the following accounts that don’t charge a fee…”
The account that was charged a fee, in fact two fees, was my checking account in NH for my rental property. When I logged in to see what the fee was for I learned it was a larger issue unfortunately: two bounced checks from my new tenants. Ugh! (See Fireside Fable #1 for more on that). I promptly alerted my property manager back in NH and asked her to keep me posted on what was going on. I’ll never forget her reply, “How the heck did you find out about this before I did?? I haven’t even heard from the local bank yet!”
On more than a few occasions I’ve found Mint.com and Personal Capital to be great resources. They are also excellent for searching across multiple accounts to figure out which credit card you put a charge on.
Fireside Finances always puts the interest of our readers first. We do not have affiliate or advertising relationships, nor do we receive any economic or referral benefit, from any of the companies mentioned in this article.