Chapter 5
Getting It All Together

In This Chapter

• Assessing your net worth
• Knowing if you need a budget
• Cutting back on expenses
• Planning ahead financially
• Keeping it all organized

We’ve spent this first part of the book considering where you are at this point of your life. We’ve looked at your life situation, your health, and the very fact that you—or any of us—aren’t as young as we used to be.

On the financial side of life, we’ve discussed what you need at this stage, what you might be wanting (remember that little BMW?) and how to know whether you can afford those tempting, but not necessary, luxuries.

And we’ve checked out your assets and talked about what you might owe. Hopefully, you’re not over your head in debt. If you are, the best thing you can do is get somebody to help you come up with a plan to reduce it. Debt, especially the high-interest credit card kind, can be a financial killer.

Having discussed all these topics, it’s time to tally them all up and determine your net worth. Maybe you’ve already got a good handle on your net worth, but many people never take the time to figure it out. Once you fully understand your net worth, you can take a good, hard look at it and decide if you’re satisfied. If you’re not, we’ll give you some suggestions about how you can improve it. This chapter also contains a couple of worksheets to help you get a better handle on your situation.

What Is Net Worth?

Your net worth, simply, is your financial situation. It’s what you get when you tally up your assets (the financial kind, that is) and subtract from them your liabilities.

You may have a net worth of $2 million (wouldn’t that be nice!), $200,000, $20,000, or $2,000. It’s whatever you figure out you have once you’ve subtracted the total of your liabilities from the total of your assets.

You’ll need to consider all those assets we talked about Chapter 3, “On the Plus Side”—your house, income, savings and investments, and vehicles—and any others. On the minus side, you’ll need to refer back to Chapter 4, “On the Minus Side,” and consider all those nasty things like car payments, credit card debt, mortgages, and monthly bills.

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 Adding It Up
Your net worth is the difference between your financial assets and financial liabilities.

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Figuring It Out

The trick to figuring out your net worth is to be specific and thorough. You’ve got to know exactly what your assets are and the entire array of expenses.

So gather up your bank statements, tax returns, and whatever other documents might provide information about your finances. Once you have, you can take a few minutes to fill out this net worth worksheet.

Personal Financial Statement of Net Worth—as of the ____ Day of ______

Personal Financial Statement of Net Worth—as of the ____ Day of ______ (continued)

Hopefully, you’re pleasantly surprised at what you’re worth. If not, you’ve got some financial work ahead of you.

Maybe You Need a Budget

Despite what most people think, “budget” is not a dirty word. Granted, it’s not as great a word as “vacation” or “windfall,” but there are much worse things in life than living with a budget. A budget is a schedule of income and expenses, usually broken into monthly intervals and typically covering a one-year period.

If your net worth is not where you’d like it to be, you’ve got a choice. You can increase your assets, or you can decrease your liabilities.

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Go Figure
We don’t know if this statistic reflects the national average, but in 2000 in Harvey County, Kansas, residents bought $1,779,868 worth of lottery tickets. There are only 33,000 residents of Harvey County, which means that every man, woman, and child spent $54 on lottery tickets.

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You could get another job, but it’s nice to be able to sleep now and then. Or you could start playing the lottery and sit back to wait until you hit it big. Of course, chances are you won’t hit it big, and the money you’ve spent on tickets will make your net worth even less appealing than it is now.

If increasing your assets is not feasible at this point, you’ll need to cut back on your expenses. And that’s where a budget comes in. Before you begin hyperventilating, understand that a budget doesn’t have to dictate every penny you spend. You don’t need to account for every pack of gum or cup of coffee you buy. A budget simply is a tool to help you get a better sense of where you’re spending your money, and in which areas you could spend less. A budget is a good thing.

A Sample Budget Worksheet

We’ve included a sample budget worksheet that can serve as a guide for your own budget. Don’t assume, however, that this sample is a universal budget. We all have different expenses. Be sure to take some time to customize the worksheet to reflect your own spending.

Sample Budget Worksheet

Sample Budget Worksheet (continued)

Once you’ve completed this worksheet, taking into account that your areas of expense may vary, you’ll have a clear picture of how much you’re spending.

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 Money Morsel
Expenses can fall into more than one category. A routine expense, for instance, may be fixed or variable. If you lease a car and pay the same amount every month, that’s a routine, fixed expense.

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Cutting Back When Necessary

In the interests of improving your bottom line, it may be necessary to cut back on your spending. As a quick review, there are different types of expenses.

• Routine expenses. These are the ones that get you at regular intervals. You can count on routine expenses. These include the mortgage, insurance, taxes, groceries, your health club fee, and your utility bills.
• Nonroutine expenses. Your car breaks down and you’ve suddenly got to come up with $425. Your 22-year-old has a once-in-a-lifetime chance to spend a semester in France, and she needs $1,575 right away to reserve her spot. Your wife gets a promotion at work and you spend $200 celebrating at the best restaurant in town. These are nonroutine expenses. They don’t come at regular intervals, and that makes them harder to plan for.
• Fixed expenses. If expenses are for the same amount every payment period, they’re called fixed expenses. Your mortgage, insurance, and health club fee are all fixed expenses.
• Variable expenses. You probably don’t spend the same amount in the grocery store every week. And some months you pay out twice as much for dinners in restaurants as other months. These are variable expenses. You know that you’ll have them, but the amount that they’ll cost you varies.
• Nondiscretionary expenses. These are the ones that you can’t get around. You’ve got to pay them. They include insurance, your mortgage, utilities, food, and so forth.
• Discretionary expenses. You need to buy food, but you don’t need to spend $45 a month to belong to a health club. You could, after all, take up jogging. You need to pay your insurance bill, but you don’t need to spend $2,000 on a vacation. The health club, vacations, movies, restaurants (all the fun things), and so forth are discretionary expenses.

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 Don’t Go There
When looking to reduce expenses, begin with moderate cuts. Don’t decide, for instance, that you’re going to reduce your food bill by 50 percent all at one time. Start at 10 percent, and see how that goes. Trying to cut back too drastically at one time may cause you to get discouraged and give up trying to save.

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If you’re like most people, it’s easier to cut spending on variable expenses than nonvariable. If your mortgage is $1,500 a month, you have no choice but to pay $1,500 a month if you plan to continue living in your house. If you’re spending $400 a month on food, however, there probably are ways you could reduce that bill.

Use manufacturer’s coupons, or buy generic or store brands instead of name brands. Trade in the Chilean sea bass for flounder, and find some good recipes for rice and beans or pasta. Buy only what you’ll use that week, even if a particular item is on sale.

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 Money Morsel
If you need some ideas for how to save, pick up a copy of 1,001 Ways to Cut Your Expenses. Written by Jonathan D. Pond, it was published in 1992 by Dell Books and is available on Amazon.com.

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Other variable expenses that usually aren’t too difficult to reduce include discretionary expenses such as vacations and entertainment. That’s not to say you should give up your trips, movies, and dinners out all together. After all, you’ve probably been working hard for 20 or 30 years now, and you certainly deserve some fun. If your net worth isn’t what you’d like it to be, however, you might consider trading the cruise vacation for a week in a little cabin on a lake. Or your ski vacation in Aspen might be reduced to a couple of days at your local slopes.

Some fixed expenses you may be able to reduce or eliminate include ones such as the monthly gym fee, the $150 or so that you spend in restaurants each month, and the $70 tab you run up on your hair and nails at the beauty shop every six weeks. You might reduce your car lease payment by trading in the Lexus for a Honda.

Once you really think about it, you’ll probably come up with many ways to cut your expenses. Look over the budget worksheet and see which areas seem to be the best candidates for cutting back. Come up with a plan on how you’ll save, and put your plan into action.

Software to Help You Budget

How you keep your budget is a personal choice. Some people like to keep track of their spending on paper, while others prefer to do it on the computer. If you prefer a keyboard to a pencil, there are dozens of software programs especially designed to help with home budgets. Some good ones are listed here:

• Balance Point
• Organizitall Budgeting System
• Home Finances (an Excel spreadsheet)
• Money Counts Personal
• Quicken for Windows
• Microsoft Money

A good software program might make it easier for you to set up a budget, but the only way to make your budget work for you is to control spending.

If you’ve been used to buying what you want whenever you want it, cutting back on or eliminating expenses might be quite difficult. Try to get yourself into a savings mindset, where figuring out how you’ll reduce or eliminate expenses is something you do every time you pull out your wallet, checkbook, or credit card.

Ask yourself if you really need to buy whatever it is you’re about to pay for. Obviously, if it’s your mortgage bill, you’ll need to write the check. If it’s a new pair of shoes or a blouse, however, you might be able to tuck your checkbook back into your pocket and head home without the shoes or blouse, but with that much more money in your account.

And don’t give up on your budget. You spending habits aren’t the same every month, so you’ll need to keep track of your expenses for several years to really get a clear picture of your spending over the long term.

Planning for What You’ll Need

While you’re assessing your net worth and maybe setting up a budget plan for your family finances, take a good, hard look at expenses coming down the road.

Failing to plan in advance for upcoming expenses can really derail your finances. Many people plan for big costs like college or a wedding, but fail to think about how they’ll pay for the plane tickets they’ll need to have in order to travel to their goddaughter’s wedding next spring.

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 Don’t Go There
If you’re working with a budget, you may become fixed on your current spending and not pay enough attention to future expenses. Ignoring expenses down the road can lead to unpleasant surprises, so be sure to plan ahead.

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Think long term and short term, and come up with a list of known expenses. If you’re planning to move or buy a vacation home in five years, include those costs on your list. If you want to take your husband on a special vacation for his fiftieth birthday, write it down. If your son needs airfare to travel back and forth between home and college, don’t forget to include that cost.

Looking at what your expenses will be in the future makes it easier to know what you can spend now, and how much you need to be saving.

Keeping Your Finances on Track

Whether or not you decide to use a budget, it’s important to keep track of your finances. Many people have little idea of how much money they have or how much they spend.

If you’re not going to use a budget, you can at least give some careful thought to how and where you spend your money. You might be surprised to realize how much you spend a week on incidentals like having the car washed, the coffee and bagel you buy on your way to the office each morning, dry-cleaning bills, postage stamps, and so forth.

Attaining a good understanding of your net worth, knowing where your money goes, and planning for upcoming expenses will help to assure that you’ll maintain control of your financial situation.

The Least You Need to Know

• Your net worth is the difference between all your financial assets and all your financial liabilities.
• If you don’t have a clear picture of your expenses, a budget can help you to know exactly where you spend your money.
• It may be necessary to cut back on your expenses in order to improve your net worth.
• Planning ahead for future expenses can help you avoid some unpleasant financial surprises.
• Having a good overview of your finances can help you maintain control over how much you spend and what you’re able to save.