Morningstar Money Challenge: Day 2

Next up: Take stock of what you have and what you owe

Ruth Saldanha 3 November, 2020 | 4:38AM
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This article is a part of a month-long Morningstar Money Challenge. You can find the details here

You’ve begun your Money Challenge, and you've already knocked one task off your to-do list! Great job!

After you’ve kept track of your expenses, it’s now time to take stock of what you have, and what you owe. Morningstar’s director of personal finance Christine Benz points out that if you keep good records and don't have many financial accounts, enumerating your assets and liabilities will be pretty straightforward and shouldn't be time-consuming, but you've got more work ahead of you if your records and portfolio are in a state of sprawl. “Think of this as your impetus to streamline and get organized!” Benz adds.

This is also called checking on your 'net worth'.

What is Net Worth?
Simply put, your net worth is the value of your assets, minus the liabilities you owe. It provides a quick and handy snapshot of your current financial position. 

Your assets are your home, or the market value of your car, or the stocks or bonds your own, or the cash in your accounts. The liabilities are what you owe – your mortgage, credit card balances, student loan balances, or any other debts. When you minus the liabilities from the assets, whatever is left over is your net worth. If you owe more than you have (which is often the case, especially for young investors who are just starting out) then you have a negative net worth.

Let’s look at an example. Kay lives with their roommate Jamie. They rent an apartment in Downtown Toronto. Here is what Kay’s financial situation looks like:

-          A fully paid off car (Market Value $3,500)

-          Inheritance from grandparent $5,000

-          Cash in accounts $1,500

That is the total of Kay’s asset. They have $10,000 in assets. Here is what Kay owes:

-          Student Loan: $3,500

-          Credit Card Balance: $2,000

-          Personal Loan: $1,000

Kay owes $6,500. The difference between their assets and liabilities is their net worth, which is positive $3,500.

How to Calculate
Benz’s book 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances includes step-by-step guidance and a worksheet for tracking your net worth, but you don't necessarily need that.

To document your assets, simply retrieve your latest account balances and estimate the worth of your personal possessions, including real estate. On the other side of the ledger, record any debts you owe, including your mortgage; student, home equity, or auto loans; and credit card balances. Subtract your liabilities from your assets and you're looking at your net worth. Benz points out that if your net worth is negative or barely positive, you've got your work cut out for you, and creating and sticking to a budget should be a key priority in the year ahead.

“And even if your net worth is comfortably positive, you should still spend time digging into the numbers. Is most of your money tied up in a single asset, such as company stock or your house? If so, a key goal should be to diversify your financial assets in the year ahead,” she says.

Additional Reading
-          Get Organized
-          How to Calculate Net Worth?

Check Your Credit Report 
Beginning your financial journey is all about getting organized and finding your financial baselines.

“One of the best ways to get your arms around your household's financial health is to check your credit report. There are free sites to help you get reports, and you can get data about your credit history from the three major credit-reporting firms: Experian, TransUnion, and Equifax,” Benz says.

You need to be able to make sure that your credit report doesn't include any mistakes that could harm your ability to obtain credit at a decent rate in the future. Checking these reports is also a good way to ensure that identity thieves haven't obtained credit in your name.

TransUnion, Experian, and Equifax all display credit information in varying ways, but all three show you the names and some basic payment history related to your credit accounts, both now and in the past. The sites also show you whether you've been late with your payments or have had some other type of problem with a creditor.

Additional Reading
-          Should You Take the Higher Credit Card Limit?
-          6 Ways to Improve Your Credit Score


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About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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