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FOOL'S EYE VIEW
By
Great Titchfield Street, London -- Do you know how much you are worth? I don't mean down to the nearest penny. But do you have a reasonable idea of what you own and what you owe? It's a vital first step in taking control of your finances and deciding what changes, if any, you need to make in order to get on top on your financial affairs. The idea of the personal balance sheet was a key part of our Investment Workbook. This was our second book, published back in 1999 (that does seem a long time ago!) But the principles are still very much applicable today, and well worth revisiting. Don't worry. It's not nearly as complicated as it sounds but it will take a little time to pull all the information together. What You Own Simply list and total up all the assets that you own in one column. A simple spreadsheet will do the trick although a piece of paper will do just as well. For most of these numbers rounding to the nearest £100 or so is probably sufficient. You might want to break down your assets into 'liquid' and 'not so liquid' boxes. By liquid we mean anything that is cash or that you can turn into cash in a fairly short period of time. So liquid assets will be current and savings accounts, TESSAs, investments (both inside and outside of ISAs and PEPs). Not so liquid would include your house and your pension. You could also include other assets like old paintings or that fine collection of fine wine you've been carefully building up in your cellar. The trick is to include only assets that will still be worth some money in, say, twenty years' time. So you wouldn't include the shiny new car, complete with fluffy dice, that sits in pride of place on your driveway. In twenty years' time it will be worth next to nothing. You might get something for the fluffy dice, though. What You Owe In a second column, make a note of all your debts. Your mortgage is likely to be the largest single entry but don't forget to include all the loans and credit cards you have, as well as any overdraft. Even though you didn't include your car as an asset, you'll need to take account of any debts relating to it. Although the car won't be worth anything in twenty years, the debt will still be there if you don't pay it off. Don't forget to add any "interest-free loans" you may have accumulated when buying the latest DVD player/video recorder/widescreen TV/fridge/dishwasher/sofa etc, etc, etc. Once you've compiled your two columns you simply take what you owe away from what you own. Hopefully you'll have a positive number (and hopefully it is a larger number that you would have got if you down this exercise a year ago). If it's not a positive number then you need to get control of your finances fast. What Next? Having spent some time getting to this number what next? For most people the main purpose of getting a handle on this number is to assess how well they are doing in saving for their retirement. You can estimate how much you might need to invest each year in order to build the retirement pot you want. But it also gives you the opportunity to compare how much each of your debts is costing you. Are you paying down the most expensive first? Or are you wasting money by only paying off the minimum balance on your credit card each month? What Happens If You've Lost Stuff?
When you get your list together you may think it looks a little light. If you've moved house or jobs a number of times it's easy to lose track of a little money here or there. Keeping good files is one way to ensure this does not happen, but that's easier said than done. This is where services like the Unclaimed Asset Register can come in handy. For a small, fixed fee (part of which goes to charity) they can search for lost life policies, pensions, dividends and unit trusts. It's also worth checking out some of the other money saving tips mentioned in this recent article in the Daily Telegraph.