[Start Here] The Ultimate Guide to Starting Your Financial Journey
Looking to get started on your own personal financial journey but aren’t sure where to begin? This is more common than you think. The world of personal finance is so large, that it can be overwhelming to try and select your starting point.
You are being bombarded by pundits and salesmen saying that you don’t have much time to act and need to “buy/read/watch (their product) NOW!”
Your finance journey should not start with stock tips on CNBC, a YouTube investing video, or buying a product. Often, a better way to start is to get clear about 2 things: where you are, and where you want to go. Only then can we begin to build a plan to connect those dots.
This guide will lead you through the following 3 steps:
1) Organizing all of your financial documents & accounts
2) Calculating your net worth (where you are)
3) Creating financial goals (where you want to go)
STEP #1: The Financial Documents Organizer
If something happened to you, would your family know where to find all your vital information? This includes your documents, passwords to accounts, and important contact information. If not, it's time to finally organize your financial life. Putting in the time now to get organized and prepared will make life easier on you and your family down the road.
Here, we’ll introduce you to the Financial Documents Organizer (FDO) -- the most important document you will ever complete. We'll explain what it is, why it's important, and some helpful tips for filling it out.
The Magic of the Financial Documents Organizer
Your financial life is a complicated mess of accounts, documents, and passwords. You may have memorized where everything is, but if something were ever to happen to you, would your family be able to figure it out without you? You need to get this information out of your head and into one organized and accessible place. That is what the Financial Documents Organizer is for.
At Hardy Capital, we have every client fill out a Financial Documents Organizer. If you don't already have one, you can download one for yourself below.
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The FDO has 8 sections, each for a different part of your life. In each section, the important items/documents are on the left side. On the right there is space to fill in the necessary information for each item. The information you will want to record will be different depending on each item. For online accounts, you may want to record the username and password, website URL, and what email you used to sign up. There are also great options for password managers such as LastPass and OnePass where you can share passwords with close people in your life. For important documents, record where it is stored, and where you would go to replace it if lost.
The most important thing when filling out the FDO is to be explicit. The FDO is a tool for others to use, so make sure everything is clear.
Another reason we have every client fill out a FDO is because it also acts as a to-do list. As you work through the FDO you will likely come across items that you have not set up yet. These shouldn't be skipped. Instead, highlight and add them to the agenda for the next time you talk to your Financial Advisor. (Don’t have a Financial Advisor? Schedule a call here to have a complementary commitment-free conversation).
How to Fill out the FDO
Remember, as you go through the FDO, keep a running to-do list of items you come across that you haven't completed yet. For example, if you haven't created a will, when you get to that line highlight it and add it to the to-do list.
Section 1: Key Contacts
The first section on the FDO is for your key contacts. Here is where you will record the name and phone number of all the important contacts you have. This includes emergency contacts, attorneys, employers, and more.
Section 2: Tracking progress
This section is where we start tracking your important documents. It is divided into 3 sub-sections: Personal Documents (social, birth certificate, etc.), Ownership Documents (real estate deeds and motor vehicle titles), and Tax (last year’s tax return, property tax records).
For each document record the “Provider contact information.” This is who you would reach out to in the event that the original was ever lost or damaged. Also record where you store the document. If the document is physical, write where it is in the house. If it’s in a digital format, write where it is stored. For Example: On My Macbook > Folder: My Documents > Birth Certificates > Filename: Emmas.BirthCert.original
We recommended that you keep both a physical and electronic copy of all important documents. If you do, write both of their locations on the FDO.
Section 3: Banking
In Section 3, you’ll want to record how you receive and where you keep all your statements. Nowadays, most of this information is delivered electronically and can be found online. You may also consider recording your login details for your various accounts.
While you are completing this section keep an eye out for any old unused accounts that you haven’t closed yet.
Section 4: Estate Planning
This is the section where you may start spending more time on the to-do list than actually filling out the FDO. According to a Caring.com study, interest in estate planning services has exploded since the beginning of the pandemic, yet 2 out of 3 Americans still haven’t set up a will. Of course, there is a lot more to Estate Planning than wills. The Estate planning section is broken down into three sub sections. Insurance, Personal and Charitable Trusts, and Special Needs Trusts.
Bonus: Don’t forget to consider what will happen to your digital assets. iOS 15.2 and above have a “legacy contact” setting that lets you specify who can access your iCloud information after you die. Read more here.
Section 5: Investment
In this section, record all your investment accounts and how to access your statements.
This includes brokerage accounts, mutual fund accounts, or other managed accounts. Also, if you have physical stock certificates, record where those are kept. As you are recording all your accounts consider the following. Does your investment strategy across accounts make sense? Would you rather have someone else manage all these accounts and investments for you? Have you considered any alternate investments?
Section 6: Retirement
In this section, record all the necessary information relating to your retirement accounts. This includes 401(k) plans, IRA’s, and retirement plans. One common account that is often missed is the old 401(k) account at a previous employer. It is usually better to roll this into a traditional IRA than to keep the 401(k) account with the previous employer, but you will want to discuss your options with a financial advisor.
Section 7: Credit and Lending
When it comes to your debt, staying organized and on top of everything is very important. In this section, you will record who your debt is with, and how to contact them.
While you are here, you should also consider recording some important numbers. Record the amount owed, monthly payment, interest rate, and payoff date for each account.
Section 8: Small Business
If you run a small business, this section is for you.
Record information on your incorporation papers, payroll records, and retirement plans. If you haven’t set up a retirement plan for you and your employees, this is something you should add to the to-do list. It can be very beneficial come tax season.
That’s everything covered by the FDO. Feel free to add any other important documents that aren't included. Spending a few hours completing the FDO will make your family's life much easier down the road. In the next section we will start to put some of this newly organized information to work.
STEP #2: How To Calculate your Net Worth
We have all looked up the net worth of our favorite athlete or celebrity, but have we spent the time calculating our own? Your net worth is a great indicator of your overall financial health, so it is worth spending some time doing the math at least once a year.
In this post, we’ll show you how to calculate your net worth, how it compares to your peers, and 3 ways to improve it.
What is Included in Net Worth?
Net Worth is all of your assets minus all of your liabilities. Assets are the things you own, such as money in the bank, your house, and investments. Liabilities are what you owe, including your mortgage, credit card debt, and student loans.
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Why is Your Net Worth Important to Know?
Net Worth is a snapshot of your financial situation in one number. A positive net worth means that you have more assets than liabilities, a negative net worth means the opposite.
Getting crystal clear about your financial situation is the first step to making plans about where you want to go. Unfortunately, many people are not clear about their financial situation. According to a study by US News, one in five Americans don’t know whether they have credit card debt. And 30% of those who did have credit card debt, weren’t sure how much interest they are paying per month. Calculating your net worth will give you the opportunity to record all of your accounts and debts in one place and have a clear understanding of where you stand.
The Net Worth figure gives much more insight than other financial numbers. You may have a very large savings account balance, and think you are in a good place financially, but if you are drowning in debt your net worth figure will be significantly lower, and rightfully so.
Tracking your net worth over time will give you feedback on how your finances are trending. You may want to come back to this post and calculate your net worth at least annually. There is nothing more rewarding than watching it slowly rise over time as you better budget, save, and invest your money.
How To Calculate Your Net Worth
Having organized records will speed up this net worth calculation. You will need multiple account balances and estimates. If your records aren’t organized yet, now is the perfect time to start. Check out our blogpost on organizing your finances.
You can calculate your net worth by writing everything down on a blank piece of paper, but this worksheet will help you do the math and also ensure that you don’t forget anything.
First, let’s calculate the value of your Total Assets. Fill in all your Cash and Cash Equivalents. This includes all of your readily available cash such as your checking, saving, and money market accounts.
Next, look up the balances of your Invested Assets. This includes retirement accounts such as IRA’s and 401(k)’s. Even though the money in these accounts will stay there until you retire, you still account for it in your net worth.
Finally, fill in your Other Assets. These are assets such as your home, jewelry, and anything else that you didn’t include yet. When it comes to Other Assets, estimates are fine. For the value of your home, you can use Zillow to get an estimate quickly and easily.
Now the worksheet will add everything up for you and give you your Total Assets.
Next, it’s time to add up your Liabilities.
First, we will look at your Current Liabilities. “Current” is an accounting term that means short-term. Here you’ll put your credit card debt, as well as tax liens or bills you owe. If you are using the worksheet, make sure you input all of your liabilities as positive numbers.
Next, we will input all of your Long-Term Liabilities. This is where you put your mortgage balance, student loans, and any other long-term debt you have.
When it comes to your debt, guessing and estimates aren’t advised. If you don’t know the exact balance you owe, look it up. While you are at it, if you don’t know other numbers such as your monthly payment, or interest rate, look them up too and make a note of them for yourself. Now the worksheet will add up all your liabilities and give you your Total Liabilities. Then it will subtract your Total Liabilities from your Total Assets giving you your Net Worth. Congratulations!
Examples of Net Worth Calculations
The following examples will show you some net worth calculations, as well as some of the uses and limitations of using your net worth number to make decisions. The examples provided are hypothetical and are being shared for informational purposes only. These are not actual client experiences.
Student Stacey
Stacey just graduated from USC. She studied Computer Science and was able to land a 6-figure job right out of college! With all this new money that will be coming her way, Stacey is thinking about what she should buy first. Maybe a new car? Let’s calculate her net worth to help her decide.
Stacey has:
$3,000 in savings.
$0 in investments.
$155,000 in student loan debt, 4.9% interest rate
$15,000 of credit card debt, 29.9% APR
Stacey’s net worth is: 3,000 + 0 – 155,000 – 15,000 = -$167,000
Even though Stacey is going to have a lot of new money coming in, she may want to hold off on upgrading her lifestyle. A negative net worth means there is more debt than assets, and if she were to lose her job, she would probably struggle to pay off her debt. Instead of a new car, Stacey should be looking to pay off her high interest debt, and building up the balances in her saving and investing accounts.
Illiquid Ian
Ian is just 41 years old and has done very well for himself over the years. He makes $350k a year, but is thinking about retiring soon. Ian decides to calculate his net worth to see where he stands financially.
Ian has:
$100,000 in savings and checking accounts
A home that Zillow estimates is worth $3.5 million
$2 million in retirement accounts, including an IRA and 401(k)
The only debt Ian has is a mortgage with a balance of $1.5 million and monthly payments of $9,000
Ian’s net worth is: 100,000 + 3,500,000 + 2,000,000 - 1,500,000 = $4,100,000
That’s a pretty big number, he can probably retire right now if he wanted to, right? Not so fast. This example shows one of the limitations of using your net worth alone to make decisions. Just because Ian’s net worth is over $4 million, doesn’t mean he has $4 million to spend. Most of his net worth is in his home equity and retirement accounts, so Ian should also consider his Liquid Net Worth. Liquid Net Worth is the same as net worth except it only considers your liquid assets (assets that can easily be turned into cash if needed).
Ian only has $100,000 of liquid assets: the money in his savings and checking accounts. The $2 million in equity he has in his home isn’t liquid because he would have to sell or refinance the home to actually receive the cash. Retirement accounts are generally not considered liquid because withdrawing money from them before 59 ½ years of age would incur hefty penalties and taxes.
After calculating your liquid assets, arrive at your liquid net worth by subtracting one year of payments on your debt. Ian’s mortgage payment is $9,000 a month. 9,000 x 12 = $108,000.
So Ian’s liquid net worth is: $100,000 - $108,000 = -$8,000
Ian has done extremely well for himself, but it may not be as easy to retire as his net worth suggests. This isn’t to say that he can’t retire if he wants to. Ian has a lot of options, but he shouldn’t be fooled by his $4 million net worth.
When you calculate your own net worth, remember that it shouldn’t be the only thing you rely on to make decisions. Consider your entire situation, including how easy it is to access your illiquid assets.
For details on how to improve your net worth, and data to see where your net worth ranks compared to your peers, check out our full blog post on the subject here.
STEP #3: How to Make Financial Goals
There are many different approaches when it comes to managing your money. Some of us are over-savers; saving every dollar we can with no end in sight. Some of us are over-spenders; spending on today instead of saving for tomorrow. Ideally, there is a perfect medium that exists between the two extremes. A place not only where you are able to spend on yourself, but simultaneously on your long-term goals. Walking the line between the two can be difficult, but it starts with making clear financial goals based on your personal values.
Why do Value-Based Financial goals Matter?
Many people focus too much on saving itself. Often the goal is simply: to save. The question inevitably becomes: when is it enough? Money is meant to be spent and once you’ve done the work, happiness should follow. When we determine what’s actually important for us and makes us happy, we can tie that to a financial goal. This is why it is important to take the time to get clear about why you save, and what you plan to use those savings for. Once you have some value-based goals, you won’t only be more motivated to save, you will be much more intentional with your saving as well.
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When making your financial goals we like to follow the following 7 steps:
Step 1: Why is money important to you?
The first step to figuring out what to do with your money is to answer the question: Why is money important to you? You may find it pretty easy to answer this question at first. Security... Freedom... etc... But I encourage you to dig a little deeper. Try and be specific with your answers. Consider how, if money was no object, you would invest your time, skills, and energy.
“Money can provide educational opportunities for my family” or “money allows me the freedom to pursue my creative endeavors without financial worry” are examples of more specific answers.
You can have multiple answers to this question. The goal is that by answering it, you will reveal the values that you want to live your life by, and how money can help you do so.
Step 2: What goals need to be accomplished in order to live a life in line with your values?
You just thought a bit about the values you want to live your life by. Now ask yourself, what goals would you need to accomplish in order to do so? Allow yourself to ask What If, and really think about what it would take to get where you want to be.
If you value being able to provide opportunities for your family, it could be:
“I don’t want my kids to take on student loans like I did”
If you wanted to be able to pursue your creativity, it could be:
“I want to build an art studio in my home” or “save enough to take 2 years off work and focus on my art”
Write down the goals you come up with.
Step 3: What are some other goals that you know need to be addressed?
You’ve asked yourself what if, but now it’s time to ask yourself what do I need? Not every goal you have for yourself will be tied to a deeper purpose, some things just need to get done. Consider the next 5-10 years. What are some financial items you know you will have to check off the list? Maybe you know the family car will need replacing, maybe retirement is coming up and you feel off track. Write these down as well.
Step 4: What are some stretch goals you have?
Finally, allow yourself to write a couple stretch goals. These are goals that also align pretty closely with your values, but may not be a top priority, or may seem slightly out of reach. This could include yearly vacations with the family, moving to a better neighborhood, or even season tickets to your favorite sports team.
Step 5: Make some guesses about each goal
Now that you have a list of some value goals, some need goals, and some stretch goals it’s time to take some guesses. For each goal you have to guess:
When do I want this goal?
How much will it cost?
I emphasize guess because it is impossible to truly know for these things for sure. But don’t let this discourage you from guessing, it is better to be 90% right, than 0%.
Step 6: Rank Your Goals
Next you should rank your goals in order by both importance and urgency. Balancing both important and urgent goals will be one of the most difficult parts of your financial journey. Important but non-urgent goals like retirement or saving up for a house seem to always get pushed aside as more urgent matters like bills or repairs come up. You should get crystal clear about which goals are truly important for you so they don’t get left behind in the bustle of everyday life.
Step 7: Make your plan
You have guessed how much each goal will cost. You ranked them on importance and urgency, so you know which goals you will be working towards first, now you just have to find the money. Just like with your goals, it is important to be as specific as possible with your plan. “Saving $150 1st each month” or “increasing my 401(k) contribution” is much better than “I’ll save what’s leftover at the end of the month.”
Additional Resources
To Review…
First, we got our financial life in order with the Financial Documents Organizer.
Second, now that we have all of these great information at our fingertips, we need to put it to use by calculating where we stand with our Net Worth.
Finally, we move away from the numbers to think about where we want to go with Financial Goals.
For more details about each of the above steps you can check out their corresponding blog posts below:
How To Finally Organize Your Financial Life
How To Calculate Your Net Worth
The 7 Steps to making Value-Based Financial Goals
Or check out the rest of our blog here.
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