Welcome to the series with the most important financial lessons our school system doesn’t teach. Articles in this Don’t Live Broke Series explore in depth each of the 7 Golden Rules of Wealth Accumulation.
Hello best life seekers!
In the Beginning Wealth Series we lay out the 7 rules of financial stability. By mastering these rules, you will become your own Midas, able to turn everything you touch into gold.
To get there you have to start with the basics and it doesn’t get more basic than Rule 1: Know Your Wealth.
I won’t lie, best life seekers. There’s a lot of heavy lifting in this article. Here at My Best Life Secrets we don’t play hide the ball though. We want you living the life you decide. However, let’s face it, to get to where we want to go, we have to know where we are now. In this day and age, that means understanding our personal finances. Rule 1 is foundational to this.
So take out pencil and paper, or better yet, open an electronic spreadsheet document because we’re about to track your financial habits and do some math.
Don’t click away! This is important to your best life freedom plan!
Did you know that two-thirds of Americans can’t pass a financial literacy test??? That’s not going to be you, best life seekers. You’re determined to master this crap so you can get on with the business of living the life of freedom you want.
So let’s dive into the deep end. After you finish implementing Rule 1, you’re going to have a status report on your best life now progress. With this, you’ll be able to make sound decisions, including tactics and strategies for financial freedom and living the good life you want and deserve.
In this article you will learn your net income, necessary expenses versus discretionary expenses, your personal cash flow, and your net worth.
The faster you do this, the faster you create the life you dream about and work so hard for. No one wants to live broke, right? Right.
Let’s dive in, best life seekers.
Rule 1: Know Your Wealth – Net Income
Know monthly net income, monthly expenses and net worth to the dollar. You can’t get where you want to go without knowing where you are now.
The latest reported median U.S. household income is $57,617. This sounds pretty good until you realize the average U.S. household size is 2.54 people. Worse, this represents gross income, not take home pay. For 2018, this median income is taxed at 25% which means actual net income becomes $43,213 for a household of 2.54 people. That’s a whopping $14,300 difference! Which means the median U.S. household actually lives on $3,601 a month and that money has to cover 2.54 people.
But that’s the gross and net median U.S. income. Where do you fit into this, best life seeker?
If you’ve ever gotten a paycheck, you know the government takes out a huge bite in taxes of all sorts. Most times the government takes out more than it’s supposed to and that’s why you get a refund at the end of the year (let’s keep it simple by not diving into tax credits and deductions). What you actually get to keep is your net pay.
Net income is broader than just your paycheck. It is all your income you actually get to keep and use. This is net pay, government benefits, dividends and capital gains, rent from rental property, etc. It is the money you make minus the tax and other withholding on it. What is yours each month?
Take up that pencil and paper or spreadsheet and title it Best Life Financial Snapshot and today’s date. Get ready to do some computation.
Yes, you have to do math. Sorry. If you want success and freedom you have to do math. This is basic addition and subtraction so it shouldn’t scare you. If just this terrifies you or turns you off, then best you get a sugar daddy or sugar mama or win the lottery because you lack the necessary requirements to control your own financial destiny.
But you best life seekers aren’t scared of elementary school kid math. Oh no. You’re like bring it! If this is what it takes to be free, you say, I can handle these simple numbers. You best life seekers are going to look at your pay-stubs or your tax returns or your investment statements and you’re going to calculate the total money you earned, subtract out the taxes and withholdings, to reach your net income. For those of you whose only income is your paycheck, it’s a simple calculation since your take home pay is your net income.
Track these entries on your paper or spreadsheet. Total them. Look at the final number. You may be shocked and appalled by how low it is compared to your gross earnings.
Still, congratulations for doing this basic step. Now you know where you are financially in terms of net income. Write this number down and memorize it.
Rule 1: Know Your Wealth – Necessary Expenses
Next comes expenses. Oh how we all hate expenses. Bills bills bills. What are you paying every month? Necessary expenses are needs, not wants so don’t include your gym membership or Starbucks runs.
Expenses include rent/mortgage, utility and phone bills, student loan and credit card payments, car payments, medical bills, insurance, food, professional fees/dues, child care, etc. Expenses are those things you are obligated to pay or bad things happen like your electricity gets turned off or your credit score gets hit.
These are your true expenses. Everything else is spending on wants – for example entertainment or leisure like Netflix subscriptions, gym memberships, dining out, vacations, etc. Wants make life really nice but at the end of the day, they are expendable. You can do without Netflix but you can’t do without your heart medication. Get the difference?
Now that you’ve calculated your monthly expenses, set that number aside along with a list of what’s generating it. This number and list is your base expenses, i.e. necessary expenses, and they are very important to know in becoming financially free. Write this number down and memorize it.
Rule 1: Know Your Wealth – Discretionary Spending
Best life seekers, you want to come out every month richer than the last. You want to be increasing your wealth because wealth is a sort of protection. It’s not everything but it keeps you from worrying about your house being foreclosed or whether you’ll be able to take that trip to Jamaica or not be eating cat food in old age.
So right now you’ve figured out how much take home money you actually make and what your true expenses consist of and how much they cost. Now, tally up how much money you spend every month on everything else. Bank and credit card statements are useful here. Find every dollar that is going out of your hands for things like splurging on that new jacket, Starbucks, concert tickets, etc. For the purposes of this exercise, include 401K or IRA contributions or money you put into savings or invest. Add it all up, best life seekers! Make sure it’s all there. This is your discretionary income.
Write this number down and memorize it.
Rule 1: Know Your Wealth – Cash Flow
Best life seekers, now we’re getting into the heart of how you behave financially. Getting a bit overwhelmed yet? Maybe noticing some patterns in your spending? Are you seeing for the first time where you are actually spending your money? Remember, to get to where you want to go, you have to know where you are.
Are you a money magnet or a money burner? In other words, what is your cash flow? Businesses that spend more than they take in soon go bankrupt. It’s the same for people.
To get your cash flow, take your necessary and discretionary expenses from the above sections and subtract them from your net income. Is that number positive or negative? If it is positive, then congratulations. Have a negative number? Then you’re spending more each month than you bring home and need immediate triage to stop the hemorrhaging!
Either way, write this number down and memorize it.
Rule 1: Know Your Wealth – Net Worth
We’re nearly done, best life seekers! Thank you for reading and working through this far. We need just one more piece of the puzzle. That piece is net worth, which is just a snap shot of our overall financial health and wealth-generating ability.
To get your net worth, you need 2 pieces of information which are your debts and assets. So now add up all your debt – credit card, student loans, car loan debt, medical debt, mortgage debt, etc. Add it all up. Great. Write it down.
Next, add up all your assets. This is the money in your bank accounts, retirement accounts, equity in your house, what you could actually sell your car for, the value of your stocks and bonds, etc. Got it all? Great. Write that down too.
Last, take your debt and subtract it from your assets. This is your net worth. Is yours positive or negative? Now, a negative net worth isn’t necessarily bad but if your ratio of debt to assets is too high, your financial position might be precarious. In fact, if you’re monthly payments on debt are more than 38% of your income, that’s a huge red flag.
Take a hard look at that net worth number. Write it down and memorize it.
Rule 1: Know Your Wealth Wrap-up
Was that a slog or what, best life seekers? Hopefully you did this exercise and learned a great deal about your financial state, including where and how you spend your money. This is where you are now and using this snapshot, you’re going to learn how to work these numbers to create the foundation for the life you want for yourself.
It all starts from this. Now that you know where you are, you can start charting a course to where you want to go. Learn the foundations of money management with Rule 2: The Midas Lifestyle.
- Don’t Live Broke Series Introduction
- Rule 1: Know Your Wealth
- Rule 2: The Midas Lifestyle
- Rule 3: Make Money Work for You
- Rule 3: Debt Payoff Option
- Rule 4: Stash Your Cash
- Rule 5: Don’t Dig Money Pits
- Rule 6: Body of the Gods
- Rule 7: Hustle
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