Using and Understanding a Net Worth Statement

by Ryan on March 8, 2010

Do you know your net worth? Your net worth statement is a snapshot of your financial health. Like a company balance sheet, a net worth statement lists all your assets and liabilities, giving you a single number that represents your financial situation at that moment in time.

What Does Your Net Worth Tell You?

The good thing about a net worth statement is that it gives you an idea of how your wealth or debts are distributed. This information is useful in creating a financial plan or understanding more about your financial health. But your net worth statement doesn’t reflect everything about your financial situation. It’s important to look at other factors such as your cash flow, debt, employment situation, and more. We’ll cover some more of these topics in later articles.

What is in a Net Worth Statement?

The goal of a net worth statement is to accurately list all of your major assets and debts and create a personal balance statement, much like you would if you were looking at a company’s books. Before you get too far into it, we should clarify which assets to list. We are only interested in assets that have cash value or can be easily converted to cash. So you would include savings accounts, retirement accounts, investments, real estate*, valuable personal property, and similar items. You wouldn’t include items such as your clothing, furniture, DVD collection, video games, etc.

*Should you include cars and houses in net worth statements? Some people prefer to include major items such as their primary residence or cars, while others prefer not to include these items. You can choose to create your net worth statement however you wish – just make sure that you are consistent in your measurements if you are tracking your net worth over time.

How to Create a Net Worth Statement

Start with a master account list. The first thing you need to create your net worth statement is an accurate list of all your financial accounts and how much money is associated with each account. Hopefully you have a master account list, which will help you know where your money is located and how to access it. Next, we list everything and add it up.

Net Worth = Assets – Liabilities

List your assets. Now that we know what we are looking for, we need to go through our master financial account list and add up all assets from the accounts on the list.  You can record them on a sheet of paper, on a spreadsheet, or by using your favorite financial management program.

Next, do the same with your liabilities. Then we will add up all your assets and subtract your total liabilities from your assets. This will give us our net worth. A positive value means you have a positive net worth, and a negative value means you have some work to do.

Tracking Net Worth Over Time

As we mentioned earlier, a net worth statement is simply a snapshot in time, and it changes as you earn money, spend money, investment values increase or decrease, you repay debt, etc. Tracking your net worth can be a good way to visualize how the total value of your accounts has changed over time. This can easily be tracked in a simple spreadsheet or with a money management software program, such as Quicken, or one of the many free online money programs.

Using Net Worth as a Tool to Understand Financial Health

Your net worth is an important number, but be careful not to place too much emphasis on it because there can be more important factors affecting your financial health. Your net worth is simply a tool that can be useful when it is used in conjunction with other financial tools, such as a cash flow statement, debt analysis, and a financial risk test (all of which will be covered in future articles). We will use these tools to help you gather a more complete picture of your financial health and hopefully help you apply these principles to find areas for improvement in your financial situation.

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Dropped off My Taxes – Awaiting The Bill!

by Ryan on March 7, 2010

I dropped my taxes off with my accountant this past week. We had a nice long discussion about my tax situation, which has changed a lot in the past year. In addition to my small business income/expenses, I had a few more fun things to consider. I admitted to being naughty – I did a bit of day trading bit last year at my online brokerage accounts. I took small losses on two trades, but made up for it with a slightly larger gain on another trade. I admit I shouldn’t have done it though. Not only does it muddy up my tax return, but short term trading is risky. Overall, I ended up with a small gain of a couple hundred bucks. Worth the risk? Well, the end result was good, but it just as easily could have been ugly, so probably not.

So now I just have to wait it out and see what the damage is – both for paying to have the taxes done and my state ad federal tax bill. I’m glad my accountant charges reasonable rates!

CompleteTax Giveaway Winners

This past week we held a giveaway for 5 free copies of CompleteTax, one of the top online tax software programs (see CompleteTax Review for more information about CompleteTax). The winners were randomly selected by using a random list generator from the site Random.org. Congrats to the winners, who should receive an e-mail notification shortly! :)

recommended financial and career articles:

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0% Interest Credit Cards for Purchases and Balance Transfers

by Ryan on March 6, 2010

A 0% balance transfer credit card is a great way to save on your credit card interest rates and eliminate credit card debt more quickly.

Credit cards – love them or hate them, they are a big part of our society. For some people, credit cards are a curse, and for some people they are a blessing. This article will cover both sides of the spectrum and show you how you can either turn that curse into a blessing by transferring your current high interest credit card balance into a 0% interest rate credit card, or how you can further take advantage of credit cards by getting a 0% APR on new purchases, freeing up your cash flow or giving you extra float so you can keep your money in the bank earning interest for you instead of someone else.

The cards in the following lists will benefit you whether you are trying to reduce your credit card debt or take advantage of 0% APR introductory offers. All of these cards are screened and updated for the latest offers, and none of these credit cards comes with an annual fee. Click through the links to arrive at the respective official credit card site for full terms or to apply.

Best 0% APR Balance Transfer Credit Cards

The best balance transfer credit cards offer a low balance transfer fee, a long balance transfer term, and a cash rewards program which is nice to have if you plan on using the card either while you are repaying your balance, or afterward. Some of the best even offer an introductory 0% APR on new charges, and are mentioned in the section below as well. Here are the top balance transfer cards.

Discover® More® CardBest Balance Transfer Credit Card: Discover More $50 Card. The Discover More card is one of the top credit cards in just about every category – cash rewards cards, balance transfer cards, 0% APR intro offers, and it even comes with a $50 cash back bonus if you spend $599 within the first 6 months. For an all around credit card, you can’t beat the Discover More card. In addition to the $50 bonus, the Discover More offers up to 5% cash back on certain categories of spending and unlimited 1% cash back on everything else. There is currently a 0% balance transfer for up to 12 months, a 6 month 0% APR introductory rate offer, and a balance transfer fee of 4%. Sign up for the Discover® More® Card.

Other great balance transfer credit cards:

  • Citi® Platinum Select® MasterCard®: 0% APR* on balance transfers and purchases for up to 15 months, 3% transfer fee, Rates are as low as 11.99% variable. No rewards benefits.
  • Discover® More® Card – Shamrock: 0% APR on Balance Transfers for a FULL 12 months; 0% APR on Purchases for a FULL 9 months; up to 5% cash back on select items, 1% on all other purchases; 5% transfer fee.
  • Discover More American Flag Card: 0% for 6 months, 3% transfer fee; up to 5% cash back on select items, 1% on all other purchases.
  • Discover® More® Card – Monogram: 0% APR on Balance Transfer for a FULL 12 months, 2.99% introductory APR. Up up 5% cash back, unlimited 1% on everything else.
  • Miles by Discover® Card: 0% for 6 months, 3% transfer fee; Travel rewards card; 12,000 Bonus Miles – 1,000 Miles Each Month You Make a Purchase for the First 12 Months.
  • Discover® Motiva(SM) Card: 0% for 6 months, 3% transfer fee; Earn 5% to 20% Cashback Bonus® at Top Online Retailers* and up to 1% on all other purchases.

Best 0% APR Interest Rate Credit Cards for New Purchases

As mentioned above, a 0% interest rate on new purchases can give credit card users a lot of flexibility when times are tough, when starting a business and they need a cushion for cash flow, or even just to float expenses for awhile and take advantage of using someone else’s money. As these cards are designed for spending, emphasis is given to cash rewards, which is why the Discover More Shamrock card is #1, even though it has a 9 month introductory 0% APR and there are two other cards with a 12 month 0% APR (they have no rewards program).

Best 0% APR Credit Card: Discover® More® Card – Shamrock. This card is very similar to the Discover More $50 Bonus card, but there are a couple key differences. The Discover More Shamrock offers up to 9 months 0% APR on purchases, and up to 12 months 0% balance transfers. There is a 5% Cashback Bonus® in categories that change like travel, gas, groceries, restaurants and more and up to 1% unlimited Cashback Bonus on all other purchases automatically. Apply for Discover® More® Card – Shamrock.

Other great balance transfer credit cards:

Why 0% balance transfer credit card offers are great

If you have credit card debt and want to eliminate it more quickly, then a 0% balance transfer may help you achieve that goal. Transferring your credit card balance to a 0% balance transfer card will move the balance from your current credit card, which probably has an interest rate around 10%-20%, to a new credit card that has an introductory 0% interest rate. Reducing the interest rate to 0% means 100% of your payment goes toward reducing the principle and none of it goes to the credit card issuer in the form of interest. The potential savings can be hundreds, to even thousands of dollars compared to making minimum payments at a higher interest rate.

Why do credit card companies offer 0% balance transfers if it means potential lost income? They make these offers to gain new customers. They may potentially miss out on a little up front money, but there is a good chance that many people will remain good customers or that not everyone will pay their entire balance off at 0% interest. They know that in the long run it will be profitable. It’s a win-win situation for customers and credit card issuers!

Why 0% interest credit cards are great

Another popular credit card offer is the 0% APR interest rate offered by many credit card companies. Why would a credit card company offer 0% interest rates on credit cards? The same reasoning applies as the balance transfer cards – to gain new customers.

There are a couple variations of the 0% interest rates offered on credit cards. They are usually offered only to new customers and in the form of a balance transfer, or a 0% APR introductory period, usually from 6-12 months. That means you don’t get charged any interest on your purchases for the entire introductory period. But watch out – you are usually required to make on time minimum payments or the interest rates will spike.

0% APR offers are great – but use them responsibly!

Credit card debt can be a huge problem so if you are using a 0% balance transfer offer to reduce your interest rates to repay your credit card debt more quickly, then be sure to stick with your plan. It can be tempting to take advantage of the 0% introductory offer, but don’t do it unless you can pay it off in cash.

As for the 0% APR introductory offers – I’m not a fan of carrying a credit card balance, but these introductory 0% APR intro offers can be useful if you having cash flow problems, need to use your credit card in an emergency, want to start a small business and need an injection of capital before the income starts coming in, or if you just want to float your charges and keep your money in the bank earning interest. Again, use them responsibly!

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How to Organize Your Small Business Finances

by Ryan on March 4, 2010

Many small businesses face a similar question shortly after they open their doors – how do we manage our money? Like your personal finances, there is no “one-size-fits-all” approach to manage your small business finances. But there are some good practices that you should follow.

Today, I’m going to give you a quick peek under the hood of how I organize my small business finances and give you some alternative resources to help you find the best products and services for organizing your business finances. The setup I use is applicable for many small businesses, freelancers, sole proprietors, and contractors. However, it may not be right for your situation (for example, I won’t cover payroll, maintaining or tracking inventory, and similar topics). Consult with a financial advisor or tax professional for more advanced needs.

Separation of personal and business funds

I recommend using separate accounts for your personal and business funds. Separating your funds may offer you protections and will make it easier to sell your business if you ever decide to sell (determining valuation, tax reasons, etc.). It also makes it easier to handle your taxes on an annual basis. You aren’t required to separate your personal and business finances, but it is generally a good idea if you are bringing in decent income.

Depending on the size and nature of your business, you may not need to separate your personal and business funds. For example, if you have what could be considered hobby income (arts and crafts, part time web design, and similar endeavors). Regardless of whether or not you decide to separate your funds, you need to keep accurate financial records for tax reasons, tracking income and expenses, and other business reasons.

Decide on your business structure

Shortly after my small business became profitable I decided to incorporate it as an LLC. The how’s and why’s for that decision will be left for another article, but one of the main reasons I did it was to create a clear legal entity for my business and facilitate opening a business savings account. Some banks or financial institutions will allow you to open a business account as a sole proprietor*, but many require you to have a business formed as as LLC, S-Corp, C-Corp, or other legal business entity. I recommend speaking with a business lawyer or doing further research on your own if you are unsure of which legal business structure you should use for your small business. (*a Sole Proprietorship is not a legal business entity, it is considered an extension of the person running the business).

Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a specific tax number for your business, similar to an SSN for your individual taxes. A specific tax number for your business is helpful when opening business savings and checking accounts, self-employed retirement plans, and separating income for tax purposes. This is also the number you give to people you do business with, so it is a good way for sole proprietors to avoid identity theft. Obtaining an EIN from the IRS is free and easy and takes about 5 minutes. You can apply for free at the IRS website.

Open Business Savings and Checking Accounts

As previously mentioned, separating your business savings and checking accounts from your personal accounts is usually a good idea. I recommend opening a business checking account with a local branch to make it easier to deposit checks and handle other tasks. Unfortunately, many local banks don’t offer high interest rates for their business savings accounts, so while I use a local bank for my business checking account, I use ING Business Savings for my business savings accounts.

You will also want to consider how you will receive payments, so consider using a service to produce invoices, receive money, handle web transactions, etc. You may also wish to open an account with PayPal and/or Google Checkout to facilitate sending and receiving money. You can also consider Intuit’s QuickBooks, which has features that allow small business owners to send and receive payments, handle online transactions, create a payroll, and maintain their business accounting. It’s a powerful tool for small business owners and is scalable depending on your needs.

Open a Business Credit Card (optional)

Chances are you will have a debit card attached to your business checking, but you may wish to have a business credit card for your expenses. Advantages of using a business credit card include cash rewards, better protections, lower liability, and the ability to float expenses, if necessary. I currently use the AT&T Universal Business Rewards Card and pay it in full each month.

Small Business Accounting Software

You can always use a ledger to keep track of your income and expenses, but with the variety of high quality, low cost, or even free software options, there is no need to try to save a few pennies and do the work by hand. Software is often quicker, easier, and more accurate than pen and paper. You can use a simple spreadsheet such as Microsoft Excel or Open Office Calc (free), or go with a specialized business accounting program.

I currently use Quick Books Simple Start, which runs less than $100 and covers my needs (tracks income/expenses, create invoices, stores images of receipts, store client/customer information, notes, and more). I haven’t found a better all in one solution for my needs and for the price than QuickBooks Simple Start. Quick Books is an Inuit company, so it is compatible with Quicken and TurboTax.

A QuickBooks version to fit your needs. QuickBooks also has various product levels to meet virtually all business needs – Online, Simple Start, Pro, Premier, Enterprise, and a version for Mac users. There are also QuickBooks versions to accept payments, run point of sale software, or do payroll. In short, there is something for most small business applications. You can check out the details for each of the various QuickBooks products at the QuickBooks website or check out some QuickBooks coupon codes for more savings.

Other popular business accounting programs include:

*A note about Quick Books and Peach Tree: Most accountants should be familiar with QuickBooks and Peach Tree, so it’s not a bad option to check out those or speak with your accountant for advice before purchasing or selecting a software program for your accounting needs.

Create a System to Organize Your Taxes

I use an accountant for my taxes, but I like to do everything in my power to make it easier on both of us. Creating a system for organizing your taxes makes everyone’s job easier. My basic tax organization system involves using Quick Books for tracking income/expenses and storing images of receipts, and I maintain several manila envelopes for each tax year where I file my receipts and invoices. I also maintain a separate folder for all legal documents and correspondences (i.e. LLC articles of corporation, IRS documents, tax forms, business permits, etc.). Finally, I scan everything to my hard drive and back it up to an external hard drive for additional protection against data loss.

Hire an Accountant that Specializes in Small Business (optional)

Not everyone needs to hire an accountant, but you may find that your personal and business tax situation dictates the need for professional help. Chances are, a good tax professional can help you find ways to maximize your business deductions and find other methods to help maximize your return. An accountant will also help you calculate self-employment taxes and estimated taxes, both of which are essential for small businesses. A good accountant should stand by their work and help you if you are ever subjected to an audit and the tax preparation costs are a qualified business expense you can write off the following year. Finally, outsourcing this business task frees your time for more important tasks, such as working on revenue-generating tasks.

Self-Employed Retirement Plans

Even if you run your business part-time and have an employer-sponsored retirement plan, you should still consider opening a self-employed or small business retirement plan. There are many benefits, including investing more money for your retirement, tax deferrals, and more. Which small business retirement plans you are eligible for and which is best for your situation will vary depending on many factors, including your business size and structure, income, and other factors.

The most common SE Retirement Plans are:

I chose to open a Solo 401k with Vanguard. After examining the plans I was eligible for, I discovered a Solo 401k was the plan that offered me the potential to contribute the most money each year (business income allowing). I chose Vanguard because they offer a wide variety of low cost funds, excellent customer service, and I have had individual investments there for almost a decade.

There are many other financial institutions that may meet your needs, many of which are also among the best places to open an IRA. *Consult with a tax professional, business advisor, or do thorough research before choosing your Self-employed retirement plan.

This is not a complete guide on how to run a business

This article only covers how I manage my small business finances. Your needs may vary depending on your business situation, the size and structure of your business, the type of business you run and other factors. You may be required to obtain licenses, permits, or other documents based on your state and local laws. Other considerations include doing business as (DBA), trademarks, etc.

Customize Your Own Financial Plan for Your Business

This is my basic business setup, and it works well for me. It may also work for your needs if you are a freelancer or other small business owner who doesn’t deal with inventory or licensing issues. Feel free to use this as a rough template to get started, but your business is unique, so customize it where necessary.

Questions or comments? Leave a comment and I will address it in the comments section or in the article, whichever is more appropriate.

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