May 18, 2012

5 Easy Ways to Save a lot of Money

Like you, I spend a lot of time thinking of ways to save my hard-earned money without creating a meaningful reduction in my quality of life. I've written a few posts on this topic already, but today I thought I would share 5 methods that I employ to keep monthly expenses down.

Before I share my 5 saving methods, let me first point out an underlying fact that I think benefits all who understand it: Where money is concerned, little expenditures paid on a regular basis can add up to huge expenses if we let them. Let me illustrate what I mean with an example:

Consider a coffee drinker. A cup of coffee will, on average, cost a couple of dollars. Gourmet coffee will cost slightly more. Either way, a cup of coffee, fancy or not, can be had for an amount of money many people carry around as change in their pockets. No big deal, right? Not exactly.

As an isolated purchase, coffee is very affordable for many people. If you're an infrequent coffee drinker, your annual total for coffee purchases might come in below $50 / yr. Not bad for an occasional cup. However, what if you buy a cup of coffee every working day? A $2.50 cup of coffee over 250 working days will cost you $625 / yr. $625 starts to sound like quite a bit of cash, depending on your financial situation. For example, $625 would get you return airfare to many holiday destinations.

Please understand, I'm not suggesting that we shouldn't buy coffee. Many people enjoy a warm cup or two as part of their day and there's nothing wrong with that. Coffee does, however, provide a compelling example of how small purchases done on a regular basis can really add up; a principle that you will see is evident in each of the five ways to save money I'll be writing about today.

Money Saving Idea #1 - Bring a Lunch to Work

For many people, I believe this represents the biggest opportunity to save a pile of money each year. Cheap food is widely available outside the home, but none of it comes remotely close to how cheaply great food can be had at home.

If you work full-time, you'll be in need of a lunch every day for the 250 or so days you're at your workplace over the year. If you eat out for lunch, even if you choose relatively cheaper dining locations, you're still likely to spend about $6.00 / day or more on food. This many not seem like a lot of money, but over the course of the year, you're spending a minimum of $1500 on lunch, which is a meaningful quantity of cash.

Worse still, if you're only spending $6.00 / day, the quality of food that you're receiving may not be up to par with what you'd like to be eating, which may have negative effects on your health in the long term as well.

The answer? Invest the small amount of time required to prepare a lunch the day before and take it with you to work. In many cases, this doesn't even require extra prep time, but will save you a pile of money. Personally, I like to just make a little extra at dinner time so that I'm sure to have leftovers for the next day. It takes 3 minutes to throw the leftovers into a container and I've got my lunch for the next day.

As a general rule, I feel that for food of similar quality, a week's worth of food can be made at home for approximately the same amount of money you would pay for one day of eating out. If you buy a $5.00 turkey and cranberry mayonnaise sandwich at a deli near your workplace, with that same $5.00 you could have bought a loaf of bread and enough turkey slices to make sandwiches for the whole week.

With this in mind, 250 days of work at $6.00 / day can become 50 work weeks at $6.00 / week. This yields some major savings:

250 days * $6.00 / day = $1500 / yr
50 weeks * $6.00 / week = $300 / yr

That's a savings of $1200 / yr!

Money Saving Idea #2 - Cancel Cable

TV is a great form of entertainment. We all have our favorite shows that we like to watch. Cable television can also become a major expense if we let it, which these days isn't as necessary because there are so many great alternatives.

With the explosion of rich media on the Internet, many entertainment providers are offering many of their shows online and free of charge. Want to catch the latest episode of Glee? You'll see it first on your TV subscription, but a few hours later it will be available for free on many entertainment network sites. Sites like Hulu (in the U.S.) and CTV (in Canada) also stream TV shows completely free of charge. There's a potential for huge savings here.

Cable TV can easily run a household $50 or more per month. If you're only using it for basic network programming, consider cancelling and seek alternative sources for your favorite shows. TV shows are widely available on the Internet, and cancelling cable will save you $600 + / yr!

Money Saving Idea #3 - Stay In One Weekend a Month

Going out on the weekend is a great way to spend time with friends. Whether you catch a movie, hit a nice restaurant or do some shopping you're going to have a good time, and it's nice to get out of the house every once and a while. These outings can also be expensive and can cost you more than $1000 over the course of the year.

To save a little bit, consider socializing at your own home once a month or so. Split the cost of some great snacks with your friends and enjoy a movie rental or play some games. Many sites on the web even list DVD releases by date making it easy to choose the latest titles. At a minimum, this should save you $100 over the course of a year. Not bad.

Money Saving Idea #4 - Take Transit

If you have the option to take transit to work, but decide to drive instead, reconsider your choice. Transit may not seem that appealing at first, but it will almost surely save you a lot of money. With fuel prices being what they are, driving a vehicle to work can be an expensive undertaking, especially for those of us who are also saddled with daily parking fees.

Although driving to work might be slightly faster and seem more convenient, don't forget to consider some of the fringe benefits that riding transit brings. If you take transit, you may have time during your commute to do things that you wouldn't be able to otherwise. Perhaps there's a book that you'd like to read or some short emails you'd like to take care of on your smartphone. Neither of these activities can be safely done during a commute in a car, but they can certainly be done on a bus or train.

If you're environmentally conscious, taking transit also allows you to help the environment. Transit vehicles are designed to carry large volumes of people so they emit far less pollution than a group of cars would to transport a similar quantity of people. This is a great service to air quality and helps to reduce congestion on our roads.

All in, it wouldn't be hard to save $250 or more per year when you account for all the gas money you'll save and the small amount you'll pay for monthly transit passes.

Money Saving Idea #5 - Simplify Your Phone Plan

These days, everyone seems to have a smartphone. Whatever the type, these phones are both highly convenient and very expensive. The initial purchase of the phone is one thing, but the real sting comes in the form of a monthly bill. To save some money, take the time to analyze your usage and make sure that you're not overpaying for service offerings on your mobility plan that you don't really need. Why pay for 3GB of data every month if you only ever use 400MB?

When it comes to mobility plans, shopping around can really help. The phone companies have devised numerous ways to package their services, so if you shop around you'll be able to find a package that gives you what you need for a price that's reasonable. Even if you only save about $10 a month in mobility fees, you're still saving over $100 a year.

Wrap Up

I hope you've enjoyed this post. If you have additional money saving ideas that you've found beneficial, leave a comment on this post for the benefit of others. As I mentioned at the start, the key to all of these cost savings is analyzing the impact of your expenditures over the long run. Ten bucks here and there doesn't make much of a difference, but when it's buying you a movie ticket or paying for a cellular plan that's thicker than what you need, month after month, it can really add up.

All told, the savings above total to above $2000 per year, which is an amount of money that can be used for some pretty amazing things. Better yet, the savings above don't inflict any unnecessary hardship on the participant; they merely trim down some expenditures that can cost us a lot when we're paying for them month after month. You might enjoy your cable TV plan and eating out every day at lunch, but do you enjoy those things enough to give up a yearly vacation? Your choice.

April 1, 2012

Naturally Improve Your Eyesight with Eye Exercises

We've all heard it said that maintaining an active lifestyle is a beneficial practice in order to maintain good health. This should come as no surprise. Our muscles, which enable our every movement, need to be frequently used to stay functional. You've heard of atrophy; it's what happens to unused muscles over time. As muscles atrophy they become weak, unstable, decrease in mass and respond poorly to nerve impulses.
Although many of us carefully keep our bodies in good shape, there are some very special muscles that are frequently neglected. Where can these special muscles be found?

In our eyes.

That's right, your eyes have muscles too, and just like every other muscle in your body, they require exercise. This may come as a surprise to you, because it's easy to think to yourself, "I use my eyes all the time. Aren't they getting all the exercise they need?". Perhaps they are, but before you jump to a conclusion, take a minute to think about your day.

Right now, for example, you're reading You've been here for a few minutes, or maybe longer. Now think, how hard are your eyes working? As your eyes scroll through line after line of internet text, they're really not being utilized to their full extent.

For a more powerful example, consider a typical day. If you're like a lot of people, your day probably goes something like this:

  • Wake up, stumble to the shower and close your eyes for a few more peaceful minutes as the water tumbles over you.
  • Get dressed, enjoy a warm cup of coffee as you rush off to work.
  • Get to work, spend the entire day in front of a computer or staring at your desk as you talk on the phone.
  • Go home, relax in front of the TV, do a few things around the house before hitting the sack to rest up for another day.

As you can no doubt deduce, for a lot of people (and you may be one such person), there really aren't many opportunities for our eyes to get some proper use. Reading, watching TV and staring at a computer screen really aren't that intensive for our eyes, and so our eye muscles become weak and we lose quality in our visual acuity. Not to worry though, because you can exercise your eyes just like you can exercise any other muscle in your body, and it's easy to do.

So how do you exercise your eyes? To get you started, I've put together a short list of some eye exercises you can start doing right away:

Eye Exercise Program

  1. Sit comfortably on a chair. Rub your hands together until they feel warm. Close your eyes and cover them lightly with your cupped palms. Avoid applying pressure on your eyeballs. Place your palms so that the nose remains uncovered, and the eyes remain behind the slight hollow of the palms. Make sure that no light rays enter the eyes, and leave no gaps between fingers or between the edge of the palms and the nose. You may still see other lingering traces of colors. Imagine deep blackness and focus on the blackness. Take deep breaths slowly and evenly, while thinking of some happy incident; or visualize a distant scene. After your eyes see nothing but blackness, remove your palms from your eyes. Repeat the palming for 3 minutes or more.
  2. Close your eyes tightly for 3-5 seconds, then open them for 3-5 seconds. Repeat this 7 or 8 times.
  3. Move your eyes upwards as far as you can, and then downwards as far as you can. Repeat four more times. Blink quickly a few times to relax the eye muscles. Now do the same using points to your right and to your left, at eye level. Keep your raised fingers or two pencils on each side as guides and adjust them so that you can see them clearly when moving the eyes to the right and to the left, but without straining. Keeping the fingers at eye level, and moving only the eyes, look to the right at your chosen point, then to the left. Repeat four times. Blink several times, then close your eyes and rest.
  4. Sit and relax. Roll your eyes clockwise, then counter-clockwise. Repeat 5 times, and blink in between each time.
  5. Choose a point you can see from the right corner of your eyes when you raise them, and another that you can see from the left corner of your eyes when you lower them, half closing the lids. Remember to retain your original posture: spine erect, hands on knees, head straight and motionless. Look at your chosen point in right corner up, then to the one in left corner down. Repeat four times. Blink several times. Close the eyes and rest. Now do the same exercise in reverse. That is, first look to the left corner up, then to the right corner down. Repeat four times. Blink several times. Close the eyes and rest.
  6. Sit about 6 inches (200 mm) from the window. Make a mark on the glass at your eye level (a small sticker, black or red, would be perfect). Look through this mark and focus on something far away for 10-15 seconds; then focus on the mark again.
  7. Hold a pencil in front of you at arm's length. Move your arm slowly to your nose, and follow the pencil with your eyes until you can't keep it in focus. Repeat 10 times.
  8. Take a pencil, or use your finger, and hold it under the tip of your nose. Then start moving it away, without raising it, until you have fixed it at the closest possible distance where you can see it clearly without any blur. Then raise your eyes a little, look straight into the distance and there find a small point which you can also see very clearly. Now look at the closer point-the pencil or your finger tip then shift to the farther point in the distance. Repeat several times, blink, close your eyes and squeeze them tight.
  9. Look in front of you at the opposite wall and pretend that you are writing with your eyes, without turning your head. It may seem difficult at first, but with a bit of practice it is really fun. The bigger the letters, the better the effect.
  10. Imagine that you are standing in front of a really big clock. Look at the middle of the clock. Then look at any hour mark, without turning your head. Look back at the center. Then look at another hour mark. Do this at least 12 times. You can also do this exercise with your eyes closed.

Eye Exercises Licensed Under Creative Commons Attribution Non Commercial Share Alike

It's that easy.

As you go through your day, try to incorporate some of the above eye exercises into your daily routine. Doing so will help reduce eye-strain, keep your eye muscles in good shape and may even naturally improve your vision. If you job requires you to spend long hours on the computer or reading, try to plan in some 30 second breaks every 15 minutes or so to focus on something far away and do one of the above eye exercises.

Your eyes will thank you.

February 25, 2012

Personal Finance: How Considering Utility When Purchasing Quality Items Can Save You Even More Money

In my last post, I wrote about how purchasing quality items can save you money. To my delight, this topic seems to have been quite popular with the people who visit this blog, and the post has received many visitors. It's wonderful to see that others are finding the things I write about useful.

One particularly astute reader remarked that my argument in favor of purchasing quality items lacked an important exception: Long term utility or lack thereof. That is, a purchased item only needs to last as long as it is useful to the buyer.

Allow me to explain.

In my original post on purchasing quality items, I shared my experience with a particular backpack that I had purchased and have subsequently used for many years. The high quality nature of my backpack has saved me money over the long run. However, the fact that I have saved money is entirely dependent on another fact; that I've needed the use of a backpack over so many years in the first place.

Consider technological items, as they provide a prominent example of the point I'm trying to make. Items like televisions, smartphones and personal computers can all be purchased with quality in mind. However, all of these items are also prone to becoming obsolete over time. Therefore, there is little point in buying such items based on how long they are likely to last. Instead, such items should be purchased based on how long they will be useful to you.

Clothing provides another example. Most people enjoy dressing rather fashionably and take pride in their appearance. Fashion trends, particularly for younger people, tend to change rapidly over time. This fact plays against the benefits of purchasing clothing based on how long it will last. Instead, you should purchase clothing to last for the length of time you'll likely want to wear it.

Determining Utility

In my original post, I described how to contrast the cost of an item against its expected lifespan. Now that we're adding the concept of utility to our discussion we need to add a third variable to our formula: We need to contrast the cost of an item over its useful lifespan. To do this, we need to understand utility.

Utility is a word used to describe the usefulness of an item or its ability to serve a particular function. The utility of an item is not derived from the longevity of an item alone. Instead, to consider utility, we must also introduce elements of ourselves. For example, a vehicle could be expected to last through a certain number of miles of use over its lifetime. However, as a driver, the car is only useful to you as long as you still have need of a car and don't mind being seen driving it. This is utility.

To determine the utility of an item, ask yourself the following question:

"How long is item X going to perform its desired function?"

Depending on the item, the answer to this question can be complex or relatively simple. Before making a purchase, consider carefully how long the item you're purchasing will be useful to you. Then, combine the principles found in my previous post and choose an item of sufficient quality to last as long as it will be useful to you. Avoid spending money on an item that will last beyond the period of time in which you'll find it useful, as extra expenditures of this nature will be very difficult to recoup.

I'll conclude by reviving an example from my previous post:
"Imagine that you need to purchase a new set of tires for your car (which you're planning to keep for a long time) and that there are two tire models you are considering. Tire A costs $80 per tire and is expected to last 50,000 kms. Tire B costs $100 per tire and is expected to last 75,000kms. Which do you buy?"
We previously concluded that purchasing Tire B is the better purchase and offered an 18% savings over the life of the tire. However, consider what would happen if we change the assumption that you're planning to keep the car for a long time and instead specify that you are planning to send the car to the wreckers in about 45,000kms. Now which tire should you buy?

Obviously Tire A is the better purchase in this case. Without considering utility (i.e. that we only need the tire to last 45,000km) we would have purchased Tire B and been out $20. This is why it's important to consider not only how long an item will last, but also how long you actually need it to last.

February 5, 2012

Personal Finance: How Quality Can Save You Money

Nearly 13 years ago I purchased a new backpack before starting university. At the time, I chose the backpack based on fit, size and because I knew it was similar to what the majority of students were using at the time. I didn't know it, but my new backpack would end up being one of the best purchases I have ever made.

When I purchased the backpack, a 30L MEC Brio (size no longer available), I paid roughly $60 for it and would have been pleased if it lasted through my first year of school. Had this been the case, it would have cost me $0.16 / day, an amount I was willing to bear for the sake of having a backpack.

Upon completing my degree, the same backpack still slung over my shoulder, I began to notice what a great purchase I had made. With my backpack still in like-new condition, I embarked on the next stages of my life and continued to carry it with me every day. It's come with me every day to work, wandered three continents and done everything else I've expected of it. It still looks great, I've never repaired it and it will soon be 13 years since I nonchalantly plucked it off the rack.

After about a decade of ownership, I made an important realization: My $60 backpack had already lasted 10 years, bringing its cost over time to less than $0.02 per day. Not only was my backpack still doing everything I needed, it was actually saving me money! Here's why:

Why Cost Over Time Matters

We all have to purchase things to get through life. Our individual needs may vary, but we all have the need to purchase things that we're unable to produce for ourselves. Some people purchase many things, others purchase few, but we all do it.

When most people make a purchase, their primary concern is to acquire the required item at the lowest possible cost. There's nothing wrong with this at all. Saving money at the time of purchase is certainly advantageous, however, since we're focused on our long term wealth, we also need to consider the cost of an item over the long term. This is where cost over time comes in.

Calculating cost over time allows us to understand how the price of a purchased item impacts us in the long run. This is very important, because it allows us to find financial savings we might not be able to otherwise. How, you ask? Allow me to explain.

Imagine that you need to purchase a new set of tires for your car (which you're planning to keep for a long time) and that there are two tire models you are considering. Tire A costs $80 per tire and is expected to last 50,000 kms. Tire B costs $100 per tire and is expected to last 75,000kms. Which do you buy?

Many people would examine this decision strictly by considering the price and choose to purchase the cheaper Tire A. Choosing Tire A saves the purchaser money upfront, but let's see what happens when we calculate the cost of the tires over time:

Tire A: $80 / 50,000kms of use = $0.0016 / km
Tire B: $100 / 75,000kms of use = $0.0013 / km

Tire B provides a savings of over 18% in the long run!

Why Quality Matters

But how do you really know how long a purchase is going to be useful to you? For something consumable (window cleaner, breakfast cereal, car tires, etc) the amount of use you can get out of your purchase is often easy to deduce. Window cleaner is sold in set volumes, breakfast cereal is sold by weight and car tires are sold with an advertised life expectancy. For items like this, it is easy to calculate the cost over time. For the breakfast cereal, you just pick the box that gives you the best cost to weight ratio. For the window cleaner, you look for the best cost to volume ratio, and so on.

What about other things though? What about a pair of shoes? What about a blender? What about a major appliance? It is far more difficult to determine the cost of these items over time because it's hard to know how long they will last. It is here that we enter the domain of considering the quality of an item.

Consider my backpack again. When I snatched it off the shelf, I checked that it fit me well and that it was the size I wanted. I did not, however, try to assess how well it was made. I didn't check if it was made out of rugged materials or if the stitching in key places was well done.

In order to determine the quality of an item you are purchasing, you have to be able to make some sort of judgement about how well it will be able to continue to serve the desired function. This can be difficult, because it may require you to understand a little bit about what you're purchasing, but it is here that you can save a lot of money.

Our world is flooded with different options for every imaginable product. Consider shoes. Even for a particular style, there are hundreds of different choices available to you. Thus, when we make a purchase, we have to carefully study the desired items to determine how long they will last. Here are a couple of tactics that can be used to determine quality:
  • Look carefully at the product and assess the build quality. Do the components look well manufactured? Are there weak points? Do the materials look like they would last a long time?
  • Read reviews. If available, reviews are a great way to learn about the quality of a product, as people that have had bad experiences will often write reviews stating their disappointment. If the reviews for an item indicate that the item is prone to malfunction, you should look at other options.
  • Trust your experience. Perhaps you've owned other items from a particular brand and have developed some trust in that brand's products.
When you've assessed quality, you're able to make a judgement about how long your purchase may last. Factoring this back into a cost over time calculation will allow you to identify potential savings. A higher quality item will often be more expensive, but it will save you money in the long run.

Returning to my backpack. No matter what, as long as I'm able to move around, I will need to own a backpack because they are my favorite way to carry things around. The backpack I purchased is still used every day and will be for years to come. Imagine for a second though that I had purchased a different backpack that wasn't as well made.

For example, it would have been very easy for me to go out and find a backpack of similar appearance and size for $25. Let's also assume that the less expensive backpack was not as well made and only lasted 2 years before needing to be replaced. Had I purchased said backpack, I would have saved $35 in upfront costs, but let's calculate the true cost of my decision over a period of 10 years:

My MEC Brio: (1 x $60) / 10 yrs = $6 / yr
Lower quality backpack: (5 x $25) / 10 yrs = $12.50 / yr

I think you get the idea. By purchasing a higher quality item, I've saved myself a pile of money in the long run, even though the upfront cost I incurred was far greater.

I've applied this lesson to countless purchases since my tough little backpack first showed me the savings that longevity can bring. Quality makes a difference and should likely be pursued whenever you need to purchase an item that you will use frequently and over a long period of time.

When you consider quality and make purchases with your long term needs in mind, you'll be freeing up future money to spend on investments and other things you can use to build your total wealth. I have every reason to believe that my backpack will last at least another 10 years and probably much longer. If it lasts me just 10 more years, it will have cost me just $0.007 / day to own and will have freed up lots of cash I may have otherwise spent on replacement backpacks.


I could have ended this post in the last paragraph, but I predict there are people who will contest my points on certain grounds, so I want to add a short corollary about exceptions to the above. Let me summarize the above into a simple rule of thumb: quality matters most for items that will be used a lot over a long period of time. If this rule doesn't apply to what you're purchasing, you should consider the item more on a basis of cost rather than cost over time.

Exception 1: Limited Use

My argument for quality does not stand for items that will experience limited use. If you're only going to need to use an item once, buy the cheapest one that will do the job and then get on with your life. Better yet, find a way to rent the item that you need. Things like special tools and disposable items fall into this category. A quality item will only save you money if you actually are utilizing the longevity of the item in the first place.

Exception 2: You're Good at Investing

My argument also fails if you're a person who is already really good at investing money. The spend now to save later mentality that I am promoting doesn't apply to people who are already very good at making their money work for them. If I, for example, could have used the $35 I would have saved by buying a cheaper backpack into $25 of new money every two years, the point of buying the quality backpack is completely moot. Saving money in the long term is only useful up to the point where it gets in the way of other growth.

Edit - 2012-02-25:

Hello everyone. Thanks for reading. FYI, I wrote a followup post to this entry with information on how further savings can be achieved.

January 16, 2012

Personal Finance: How to Calculate Your Net Worth

Hi everyone.

My posts thus far have mainly been focused on setting goals and taking ownership of our lives. I'll certainly be writing more about those topics, but I'd like to break into another topic area that is always on my mind.

Personal finance.

I want to be wealthy. I want you to be wealthy. It's something that I want not because I'm a very material person, but because I seek many of the comforts that financial stability brings. Financial stability brings with it reduced stress over financial matters and increased opportunities to do the things that we want.

In the hustle and bustle of modern life, becoming financially stable isn't an easy task. If it's something that you've struggled with, don't be ashamed. There are lots of activities, side-tracks and even generally-accepted bad behaviors that carry us away from financial stability. The road to financial stability is not an easy one; it's one that requires huge amounts of discipline and a certain amount of financial understanding. Financial stability doesn't happen overnight. It doesn't happen by just having a stable job. Financial stability and building true wealth takes time, long-term planning and a commitment to your own personal long-term wealth.

When it comes to analyzing my own financial position and charting my progress, there is one calculation that I think matters more than anything else:

Personal net worth.

There are literally thousands of financial formulas that a person can learn, but unless you can calculate your net worth, you're going to have a hard time understanding your own financial situation and growth.

So what is net worth? Simply put, net worth is just the grand total of an individual or organization's assets (cash, property) minus their liabilities (credit card debt, mortgages, etc). Calculating net worth only requires some basic additions and subtractions to complete. It's first grade stuff.

Why is calculating your net worth so useful? When you calculate your net worth, the resulting number gives you an idea of your financial position with all things considered. Let me give you an example of why this is so important and powerful.

Imagine that you have a friend named Frank. Frank bought a home a year ago for $200,000 and had $5500 cash in his bank account after the purchase. To purchase his home, Frank made a 5% down-payment and mortgaged the remainder. When he purchased his home, Frank told you how excited he was to start building wealth and how gratifying it is to be a home owner.

At present, a year after his home purchase, you bump into Frank again and ask him how he's enjoying his house. He's overjoyed with how things are working out for him. He tells you about how he got a raise at work after purchasing his home and has been able to pay down his mortgage principal by $10,000 in the last year. To celebrate, he has just bought himself a new car for $17000 with 0% down and took a month-long vacation to Europe at a cost of $4,000 which he billed to his credit card. Frank also tells you that he still has the $5500 saved in his bank account and feels that he is on a great financial path.

You smile cautiously at Frank and wish him a good day. You worry about his financial future.

Why do you worry? Let's calculate Frank's net worth to see what's what:

Year 1 Net Worth: Assets - Liabilities = ($200,000 + $5500) - $190,000 = $15,000
Year 2 Net Worth: Assets - Liabilities = ($200,000 + $5500) - ($180,000 - $17000 - $4000) = $4500

Even though it looks like Frank is living a pretty good life, he has managed to decrease his net worth by $10,500 or 70%. Frank doesn't know it, but his past year has been a financial disaster. To make matters worse, his use of his credit card and car purchase will have saddled him with additional interest payments that will lay waste to his income. Despite what he says, Frank is not on a great financial path. Frank is marching towards bankruptcy and financial ruin. Don't be Frank!

How to Calculate Your Net Worth

Frank's situation is a scary example, but it's one that you may not have to look very hard to find, even among people you know. What's most important about the example I've provided is not the numbers involved but the percentage change year over year. If you calculate your net worth on a regular basis you can use the resulting values to track your progress towards wealth and financial stability. Here's how:

Once again, the formula for calculating your net worth is simple:

Net Worth = Assets - Liabilities

When I calculate my own net worth, for clarity sake, I like to break Assets and Liabilities down into small things. Here's the template I typically use:

  • Assets
    • P - Real property - Your house, apartment, land, etc. I generally use the purchase price of the property for calculation sake. If you want to be fancy, you can correct the purchase price for inflation, but be cautious of using the market value as this can fluctuate violently if conditions turn poor.
    • C - Cash - The money in your bank account. This should include money that you have set aside as savings.
    • R - Retirement Savings - If you have a 401K or an RRSP, you can include the total balance as an asset. Even though these funds aren't available for your immediate use, they do form an important part of your growing net worth.
    • S - Securities investments - Your stock, bond, etc. portfolio. Calculate the total market value of your current holdings.
    • OA - Other assets - Vehicles, equipment, etc. Be cautious of how you value items that fit in this category. I often exclude it all together. If you purchased a car a year ago for $10,000, it likely wouldn't fetch the same price if resold. Items in this category will be subject to depreciation and you should depreciate their value as required before adding them to your net worth calculations. Exclude all together items that you own that depreciate rapidly or can become worthless rather suddenly. For example, if you just bought a $2000 laptop, you should consider that money as good as gone. Don't count it as an asset, because if it breaks or is lost, it's worthless to you.
  • Liabilities
    • M - Mortgages - If you own real estate, you may also have a mortgage. This is a huge liability against your net worth. Be certain to include the amount of remaining principal you have left to pay off in your net worth calculations.
    • CC - Credit Card Debt - Credit cards are heavily used by many people. If you have credit card debt, you must include the remaining principal in your net worth calculations. Don't worry about including interest payments as liabilities, just consider what you owe. The impact of interest on your net worth will become very apparent as you calculate your net worth month over month.
    • L - Loans - Student loans, home equity loans, car payments etc. Take the principal owing of all other loans you have and include them here.
    • OD - Other debt - Personal loans, store credit, etc. If you owe any other money, be sure to include it here.
Obviously the above is just a guide. Use your judgement to create categories that suit your individual financial situation and always be conservative with your valuations of your assets. Based on the above, we can refine our formula to:

Net Worth = (P + C + R + S + OA) - (M + CC + L + OD)

Try calculating your own net worth right now. The result might surprise you.

When to Calculate your Net Worth

You can calculate your net worth as often as you like, but you should be sure to do it at least monthly. Over time, you net worth values will fluctuate as your financial position improves or worsens. What you want to see is that your financial decisions are creating growth in your net worth.

Calculating a percentage gain (or loss) against your net worth each month can be incredibly useful as you track your progress. Big purchases that you can't avoid or bad investment decisions might cause your net worth to fall, but your overall goal should be to see your net worth consistently grow. If you look at your net worth and see that month over month your net worth is growing by a few percentage points each month, you're on a good track.

Spreadsheet software such as Excel or Google Docs is a great way to record each month's net worth and calculate your growth. As with anything financial, use your net worth calculations to spot trends and identify opportunities for further growth and savings. Do it monthly, and I promise you'll find ways to improve your financial position and increase your net worth.

Trends to Watch For

As you calculate your net worth month over month, you'll begin to notice some trends. Here are a couple that may stand out:
  • Interest payments
    • If you have a mortgage or credit card debt, calculating your net worth will put the financial cancer of interest payments front and center in your life. If you make $3000 in a month in net income and know that your living expenses are $1000 a month, you would expect to see your net worth increase by $2000. If you have interest, it won't, and you'll know why. When you see the toll that interest takes on your net worth, I promise you'll be filled with motivation to pay down your debts.
  • Securities investments
    • If you have a stock market portfolio, you may see violent fluctuations in your net worth if the general market is performing poorly. Use this awareness to temper your stock investment decisions. If your stock positions could send your net worth into the negatives if the market faltered, consider revising your positions. Never put all your eggs in one basket.
  • Cash
    • If you have a lot of cash on hand, month after month, you'll likely start to recognize that it's not doing your net worth any favors. Cash in the bank doesn't grow quickly. If you have some to invest, research ways that you can use your cash to grow your net worth. You should always have some cash around for emergency situations (vehicle repairs, sickness, etc), but if you have a very swollen bank account, find a way to use the cash that will hasten your net worth growth.
You'll likely identify other trends as well. Study your net worth outcomes carefully.

Net worth is a simple formula with powerful implications. Use it!