Monday, February 3, 2014

Budget Boot Camp - To Do #1: Calculate Your Net Worth

Pop Quiz: 

How is it possible that rich, famous MULTI-millionaires can end up not only broke, but in huge amounts of debt? I hate to call out the beloved “U Can’t Touch This” creator, but MC Hammer is the perfect example. And how is it possible that my own dear Grandpa was able to comfortably provide for his large family and have plenty saved for retirement working as a humble dairy delivery man? Budgeting, baby. Many people think the solution to financial stress is to make more money, but that's just one part of the equation. Without budgeting, it doesn't matter how much money you make because it won't ever be enough. Not only will budgeting help you avoid financial disaster, it's how you'll reach your financial goals (Don't have any specific financial goals? You will next month--stay tuned!).

Just like regular boot camp, if you're out of budgeting shape, this isn't going to be easy. Adopting any new habit takes dedication, but we're here to help by breaking it down into one manageable task (or “To Do” Item) per month. Stick with us and you'll end 2014 with a
powerful budgeting system in place (that you can actually stick to!).

In order to keep your "To Do" list manageable and really lay the foundation for lasting financial success, we'll be taking things slowly at first (This means you won't have to set up your line-by-line expense budget until Month #3). If you'd rather hit the ground running and do all the budgeting steps right now, go for it (check out this step-by-step post here)! Just know we'll be covering everything in greater detail in future months.

Anyone out there already have a budgeting system in place? Already accomplishing your financial goals? 
Great! Please share your advice and experience in the comments. Also, if you’re ready to kick your financial preparedness up a notch, we’ll be giving an “Extra Credit” Assignment each month (see below). If you’re able to do those, we’ll dub you an official MHM Finance Ninjas! (Okay, that’s not an actual distinction, but it should be).

Now . . . for your first BBC (Budget Boot Camp) Assignment…

To Do: List All Your Accounts and Their Balances (Calculate Your Net Worth)

The first step towards financial fitness is figuring out where you are. It's painful, but crucial. You'll need it to track your progress (especially if you're trying to get out of debt). Think of this as your boot camp “fitness test:”

STEP 1. 

Pull up a spreadsheet or get a piece of paper and write down a list of EVERY account you and your spouse have. You will need this list in future months.
Possible accounts include:
- Bank Accounts (savings, checking, money market, etc.)
- Investments (401(k), Roth or Traditional IRAs, Brokerage Accounts, any individual holdings, etc.)
- Your home (it will be offset by the mortgage in the liabilities section below)
- Personal Assets (e.g., cars, boats). Including these in your net worth calculation is optional. I don't include them because most personal assets are illiquid, meaning they're hard to quickly convert to cash. If you do include them, put the current selling value, not what you paid for it.

- Credit Cards (including specialty cards: e.g. Target, Gap, Southwest)
- Loans (mortgage, auto, student debt, personal line of credit, home equity loan, etc.)

STEP 2. 

Look up the balances for every account OR import them all into a budgeting tool that will update the balances automatically. Examples of free budgeting tools arMint and Yodlee (we will be giving handy tips for these tools in future months). Neither tool can link to 100 percent of all financial accounts out there, so if you have a crucial credit card that won't link up on one tool, try the other. The most important accounts to link for budgeting are your major spending accounts (i.e., your bank accounts and credit cards). Less active accounts (such as retirement accounts or loans) can be manually updated without too much hassle if they won't link properly. For example, our mortgage account never updates, so we look up the balance occasionally when we need an accurate picture of our net worth. You may find it helpful to use both a budgeting tool and a spreadsheet when budgeting so you can can easily update your account balances (we'll cover this tip in Month #3)

How to Calculate Your Net Worth

You'll notice the examples of accounts above are grouped into assets and liabilities. Use those to calculate your net worth (if your accounts are all up-to-date on Yodlee or Mint, it will do it for you).

Assets - Liabilities = Net Worth

It's a simple, but powerful calculation. And figuring it out is the first step towards making that number GROW!

Any questions?

Add a comment at the bottom of the post here and we'll get back to you ASAP!

Extra Credit Assignment: Read up on our 10 FAQs about 529 (College Savings) Plans. If it fits your family and financial situation, set some up!

And to put the "Mamas" in Money Hip Mamas, my favorite Mom products of the month are (you may notice a running theme here):
What's helping my 4 month old baby go to sleep: Munchkin Nursery Projector & Sound System
What's helping my 2 year old toddler sleep in: OK to Wake! Children's Alarm Clock and Nightlight
(Besides the above) What's helps me sleep during fall/winter/spring: Soft Heat MicroPlush Top Electric Warming Mattress Pad (It's ten times as amazing as it sounds).

Money Hip Mamas is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to

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