Tuesday, July 4, 2017

Your Annual Report

Corporations have annual reports, why not you?

This posting is a little out of sync, as it would make more sense in December or January.  But last December, I ran my free annual credit report, as I always do around Christmas.   As you know, there are three different reporting agencies that provide one free annual Credit Report each, as required by law.   And in the future, I think I will stagger these (December, April, August) so I can check for any issues three times a year.

I also prepare an annual "net worth" statement, which I print out and keep in a binder.  Thanks to online financial sites (Bank of America, Merrill Edge, Fidelity, Northwestern Mutual, and others) you can calculate your net worth pretty easily.   The Merrill Edge site tracks all of your investment accounts, your real estate values, various debts, and bank account balances, all in one click.  For accounts that can't be automatically tracked, you can manually enter data, such as blue book trade-in value of your car.   There is really no excuse these days to not know your net worth.

And of course, your FICO credit score is available from a number of sources - no longer a guarded State Secret.  Your credit card provider may show you this, or CreditKarma, among others (expect to be a difference between various sources, but it gives you a good general idea). 

Put this all together, and you have your own personal or family annual report.   I prepare a simple WORD document summarizing this data, presenting this year's and last year's net worth, savings, and debt, along with this year's credit score, real estate values, life insurance values, and even projected social security benefits.  Comparing this data with the previous year, and you can tell whether you are getting ahead in life or sinking slowly further into penury.  Is your debt load going up or down?  What about net worth?   Savings and investments?  Credit Score?   It is helpful to understand where you are in life, financially, and where you are heading.

It is also useful in discussing finances with your spouse and even children - something most families don't do enough of.    Often the spouse and kids want a new car, a new cell phone a new this-and-that, without understanding that these things can cumulatively drag down family finances.  If I had known how hard my parents struggled financially to get ahead (and how little money they actually had) I certainly would have behaved differently.   But since this was a closely guarded secret, we merely assumed they were well-off and thought nothing of making demands of them.  Having goals and showing whether you are making progress toward goals is essential to getting ahead in life.  And having family goals, instead of a race-to-the-bottom would have been better for everyone concerned and brought us closer together as a family.

For much of my life, I had no such plan in place, and did not even calculate my net worth.  It wasn't until I was a year out of law school (1993), age 33, nearly a quarter-century ago (where does the time go!) that I sat down and calculated my net worth.  It was a whopping $68,901.98.   I had maybe $300,000 in assets, and a quarter-million in debt.   It was not a very cheering thought, although at the time, I felt that sixty grand was a whole lot of money (but less than our annual income!).

Like an overburdened airplane slowly gaining altitude, this amount increased, slowly at first, and then accelerating rapidly.  Within a few years, my net worth had doubled.  Life insurance policies started to accumulate cash value.  I put more into pre-tax savings accounts (401(k), SIMPLE IRA, etc.) - motivate in part by these calculations.  Our investments in Real Estate started to climb in value as well.   Like a snowball rolling down a hill, it got fatter and fatter.

But I am not sure any of this would have happened, had I not started to calculate our net worth and check our annual balances of savings and debt.

Do you have a personal or family annual report?  Think about preparing one.  During the holiday season, there is little else to do during that dreaded Christmas-to-New-Years dead zone, anyway.   It might be a good deal to figure out, for the New Year, where you are heading, and where you've been.