Investing Series Part 2 - Get Your House in Order

The foundation you need before investing

What Nate? I thought this was an investing series. What's this all about getting my house in order? And to you, dear friend, I answer that investing is hard when you don't know where your money is going today. I know this isn't the sexy stuff, and I promise we will get there. But this is important. The reason why we invest is so that we can have financial independence. To even figure out how much you need for FI, as I stated in the series part 1, you have to know where your money is going and how much is coming in and going out so that you can even calculate your FI number, let alone sock away money to watch it grow.

Today we will talk about two things you need to track and measure. Your income and expenses, a.k.a a budget. I know it's a scary word, but I promise it isn't that bad. Then it would help if you tracked your net worth. The goal is for these to trend up and to the right.

Figure out your gap and track your expenses.

I use a simple process. I use three steps.

Track Your Expenses

The first step is to track 90 days worth of expenses. Some of you A-type personalities are freaking out right now. I want to start budgeting today. I don't want to wait 90 days. You don't have to wait 90 days to start, but creating a system to track expenses today is the first step. I prefer YNAB, but you can use a free tool like Mint or a spreadsheet.

Then go back 90 days, add or download all your bank and credit card statements, and categorize them.

Give Every Dollar a Job

After tracking your expenses in the future, you will start to give every dollar (your income) a job. I would use your historical averages as a baseline. Don't forget to figure you non-monthly expenses like annual premiums and non-recurring expenses like home and auto maintenance.

The Gap

If your income is higher than your expenses, you have a gap. If it is the same, you don't have a gap. If your expenses exceed your income, you have a negative gap. If you find you have no gap or a negative gap. First, take a deep breath and then look at your expenses and see what you forgo or decrease to start creating a gap.

This should be done monthly. If you have a spouse or a partner reviewing this together is a must.

Figure out your net worth.

Ever sin Robert Kiyosaki came out with "Rich Dad, Poor Dad," he muddy waters with what an asset it is. Although I do appreciate the mental framework provided to start thinking about what puts money in your pocket, it, for some re on, overcomplicates the net worth tracker. Your net worth tracker should be sim e. It should be your assets minus your liabilities, and voila, that's your net worth. Get a spreadsheet, or if you've jumped on he YNAB train, I keep peddling, you can date it there and log your assets and liabilities. What are assets and liabilities, you ask? I like Dave Ramsey's definition cause it's the simplest.

Asset = Things you own, Liabilities = Things you owe

Assets

1. Cash, Checking, Savings
2. House Value
3. Car Value
4. Retirement Accounts (401K, 403B, IRA, Roth IRA, etc.)
5. Investments (Index Funds, Stocks, Bonds, Mutual Funds, Real Estate, Crypto)
6. Business Value (If known)

What I don't include

1. Personal property - This is a pain to track and usually wrong
2. Life Insurance Value (Yes, even Whole Life)

Liabilities

1. Credit Cards (That carry a balance)
2. Car Loan
3. Mortgage
4. Cell Phone Payments (The ones where you have to pay x amount to get your free phone even if they 0% interest)

Reaccess at minimum yearly. I personally do it monthly but not really a requirement.

Conclusion

Investing is a key part of becoming ultimately financially independent. Still, you need to be able to measure where you are going, and you need the ability to create a gap so you can invest.

Disclaimer

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This article is informational; it should not be considered Health, Financial, or Legal Advice. Not all information will be accurate. Consult health, financial, or legal professionals before making any significant decisions.

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Updated 11/2/23