Web 2.0 Personal Finance

Today’s post is by Nick Barber who works for UK discounting site VoucherCodes.co.uk

Personal finance has moved on and people are now roughly separated into two groups; those that are savvy online and those that are not.  There is a myriad of tips of tricks beyond the usual blanket “buy online” advice that can slash your usual monthly spend painlessly by about 20%.  These personal finance tips however can be leveraged in the worlds of investing and of small business too so you offset the hefty start-up costs that are often incumbent on the budding entrepreneur.

Before you know where you are going to make savings however, you need to know exactly how your finances are shaping up. In recent years there has been a proliferation of online software packages that will help you keep your bookkeeping in order. Mint is a great example. Once you sign up and enter your details, it will automatically pull in your balances from different accounts, updating in real time, so you can always keep on top of how much you are laying out each month. This information can then be used in conjunction with their budgeting software and there is even functionality to check how your investments are doing.  What is more – it’s completely free!

The second tip for knowing where you stand financially is to check your credit report. Your credit report is, put simply, a record of all the debts you have taken out in the last 6 years, right down to cell phone contracts, as well as a record of how well you have managed to repay them. Experian offer a free credit report when you register with them. It is essential to check for mistakes – which happen more regularly than you think. Even the smallest error can reflect badly on you which is especially important with banks having access to your records. If it seems you have missed just a few payments, this can result in a much higher rate of interest on your mortgage and other borrowings. Correcting mistakes can result in savings of hundreds of dollars a month; as well as opening up more finance to you.

Now you know where you stand; it’s time to make savings. (more…)

Finding Your Net Worth

Photo by: SLR Jester

What Is An Asset?

An asset is something that is owned by you.  Typically used, it would also need to have value.  I may have a wad of used chewing gum, but since I can’t turn it into cash very easily it’s not really much of an asset.  Sometimes intangible things are considered assets, like goodwill or trade secrets.  While you often can’t really sell these, they have value and are considered on your balance sheet.  All this may sound pretty complicated, but when it comes to personal finance, your assets can be summed up pretty quickly.  What do you own that’s worth something?  Those are your assets.

The biggest assets most people have are their home and their car.  They also, of course, include their cash and savings, as well as their stocks and retirement accounts.  Some things that many people forget to include:

• Cash Value Of Insurance Policies
• Jewelry
• Furniture and other household goods
• Timeshares or other partial ownership

An important thing to remember however, is that these assets are worth the amount for which you can sell them, not what you paid for them.

Liabilities

Liabilities are what you owe.  The most common liabilities are mortgages, car loans and credit cards.  Personal loans count as well, and many of us are still saddled with student loans.  Generally the value of liabilities are much easier to calculate than assets, as usually we have an outstanding account balance.

Net Worth

Once you’ve summed what everything you have is worth and removed the value of what you owe, you have your net worth.  Sadly for many Americans this value is less than zero.  For these people they’ve worked all their lives and have less to show for it than the day they were born.  One of the easiest ways to get into this circumstance is to purchase a depreciating asset on credit.  Every time you get a car loan you are purchasing–on credit–an item that will decrease in value.  Often during the course of ownership we are upside-down on our car, meaning we owe more than it’s worth.

The current economic crisis stems largely from a variety of people making similar purchasing decisions, but on a much more dramatic and large scale.  Homeowners, for example, rushed out and bought homes that they couldn’t afford under the premise that the homes would appreciate.  When they depreciated instead, these people were suddenly making interest-only payments on a house that wasn’t worth its original purchase price.  At the same time, banks were purchasing–on credit–Collateralized Debt Obligations and other confusing debt instruments that they didn’t understand.  When those turned out to be worth much less then anticipated, they found themselves in very similar circumstances.

The lesson is to not only monitor your net worth carefully, but to take into account which of your assets have realistic valuations.  House and stock prices fluctuate, and you should be amassing net worth outside any perceived increases in the value of these assets.  Ultimately you need to be saving in addition to purchasing.  Buying a house is not an investment strategy, it is a chance to fulfill a need for a place to live.  Recent history has certainly shown that housing prices do not always go up.  If the only saving you do is making your house payment, then your real net worth may not be changing, or it may even be changing to the negative.  Paying close attention to your net worth and its make-up is a key to a secure future.