Chapter 1

Your Financial Checkup

IN THIS CHAPTER

Calculating your net worth and savings rate

Getting your credit score and keeping an eye on it

Growing your investment portfolio and eyeing insurance options

Examining common money mistakes

Where did your childhood years go? Was it that long ago that you were concerned with what exams you had coming up, what you might be doing over your summer break, and what kind of job you were interested in and qualified to do?

As a young adult, you wonder where you are going to live, how much a decent apartment will cost, and how much you will actually have left over after taxes and those other pesky deductions that are taken from your paycheck. How much will it cost to buy a home that you'll really want? What are the best ways to save and invest your money?

And then life throws you a curveball like the COVID-19 government-mandated shutdowns, which turned plenty of young people's lives upside down in a way that few saw coming. Or perhaps an aging parent or other relative needs some help. How can you handle these situations personally and financially?

Those are some pretty big questions that even people 20 and 30 years older than you struggle to answer. You're wise to be thinking about these topics now. In this chapter, I help you start to answer those questions by showing you how to evaluate your net worth (addressing any debt, such as student loans, credit cards, or auto or other consumer loans). I also help you assess your savings rate, credit health, investment portfolio, and insurance coverage so you can develop and implement a winning plan tailored to your situation.

Calculating Your Financial Worth

Having a sense of what you own (your assets) and what you owe (your liabilities) is important because it provides some measure of your financial security and your ability to accomplish financial goals such as buying a desired car, buying a home, traveling, starting a business, or retiring someday.

In this section, I define net worth and then walk you through the relatively simple calculations of determining your own personal net worth.

Defining net worth

Your net worth is quite simply your financial assets (for example, checking, savings, and investment accounts) minus your financial liabilities (debts such as student loans and credit card debt).

When I discuss your monetary net worth, I'm not talking about personal possessions. Your car, clothing, television, computer, and other personal items all have some value, of course. If you needed to sell them, you could get something for them. But the reality is that you're unlikely to accumulate personal items with the expectation of later selling them to finance such personal goals as buying a home, starting a business, retiring, and so forth. After all, personal property declines rapidly in value after purchase and use.

Figuring what you own: Financial assets

To calculate your financial assets, access your checking/savings and investment account records, including retirement accounts and any other documentation that can help you. You may have only one or two accounts, and that's fine. Add up all the values of these accounts to find out what you own.

It's common for most young adults to be in the early stages of accumulating assets. This book helps guide you through the best ways to do just that.

In addition to excluding personal property and possessions because folks don't generally sell those to accomplish their personal and financial goals, I would also probably exclude your home as an asset if you happen to own one. (You can include it if you expect to downsize or to rent in retirement and live off of some of your home's equity.) Include investment real estate - that is, real estate that you own and rent out.

VALUING SOCIAL SECURITY AND PENSIONS

Now or in the years ahead, you may accumulate some retirement benefits based on your years of work. You may do so through the federal government's Social Security program and/or through an employer's pension plan.

When you work and earn money, your employer (or you if you're self-employed) pays taxes into Social Security, which earns you future Social Security retirement income benefits. Under current laws, which of course may change, you're eligible to receive full Social Security benefits at age 67. (You may collect a benefit reduced by 30 percent if you begin receiving your Social Security payments at age 62.)

In surveys, most young adults say that they're more likely to believe in things like UFOs than in actually getting money out of Social Security! Although being skeptical and questioning things is useful, such deep cynicism about Social Security isn't well founded. Those who are eligible to receive benefits (generally, folks who've paid Social Security taxes above relatively low threshold amounts over at least ten years in total) should get them. As a young adult, it's important for you to also know that some Social Security benefits, such as disability and survivorship benefits for your children under 18, are a part of your Social Security insurance coverage.

Some employers provide a retirement benefit known as a pension that's paid to you in retirement based on your years of service (employment) with the organization. Your employer puts aside money above and beyond your salary compensation into a separate account to fund your future pension payments. Pension plans are more common in public-sector organizations (governments, schools, and so on) and larger companies, especially those with labor unions. Pension plans are generally insured/guaranteed by government agency entities.

Now, I do have one exception to something that isn't generally thought of as a financial asset, which you may or may not want to include in this category. Some people have valuable collections of particular items, be they collectible coins, sports memorabilia, or whatever. You can count such collections as assets, but remember that they're only real assets if you'd be willing to sell them and use the proceeds toward one of your goals.

Determining what you owe: Financial liabilities

Most people accumulate debts and loans during periods in life when their expenditures exceed their income. I did that when I went through college. You may have student loans, an auto loan, credit card debts, or a medical or pet debt. Access any statements that document your loans and debts and figure out the grand total of what you owe.

Netting the difference

After you total your financial assets and your financial liabilities, you can subtract the latter from the former to arrive at your net worth:

financial assets - financial liabilities = net worth

Don't worry if you have a small or negative net worth (where you have more debt than assets). There's no point wringing your hands over the results - you can't change history. And, it doesn't matter how you compare with your peers even if we can accurately define exactly who your peers are. This isn't a competition or test.

But you can change the direction of your finances in the future and boost your net worth surprisingly fast to work toward accomplishing your personal goals. First, you have to figure your savings rate and how to increase it, which I discuss next.

Grasping the Importance of Your Savings Rate

To accomplish important personal and financial goals such as building an emergency fund (the COVID-19 pandemic has proven the absolute need for emergency fund savings), buying a home, starting a business, traveling, and someday retiring, most folks need to save money. Some exceptions do exist, such as those folks who have trust funds or inherit significant-enough sums that they don't need to save money from their work earnings. But the vast majority of people must save in order to accomplish their goals.

You can't effectively save for a long-term goal if you don't know what your savings rate is. When I worked as a financial counselor and taught adult-education money-management courses (which I now do online), I was struck by how few people knew the rate at which they were saving money. Most people can tell you how much they earned from their work over the past year, but few folks really know what portion of their employment income they were able to save. That's because to have an accurate idea of this percentage, you really need to do some analysis and calculations. The math isn't that complicated, but it does require some time and effort, especially if you haven't been tracking your spending or net worth over the past year. In the following sections, I explain a couple of different ways to calculate your savings rate over the past year.

Calculating your income and outgo

The first way to determine your savings rate is to tally your employment income and expenses over the past year. By subtracting your total expenses, including taxes, from the past year from your employment income, you can arrive at net savings.

The employment income part of the equation is simple for most folks - it's simply the total amount of your paychecks from work. (If you have work from side or gig jobs you do...