Do You Know Your Numbers?
Numbers can be scary for some people. They see numbers and suddenly have high-school algebra flashbacks accompanied by cold sweats and panic that they haven’t studied for the big test. Yet, as much as we would like to live in a land without numbers, it simply isn’t practical: numbers are everywhere. The questions is, do you know your numbers? A big part of being financially secure is having a good grasp of your specific numbers.
What do I mean by this?
Your #1 Number to Know: MVB (Minimum Viable Budget)
If you were to suddenly lose your income, what is the minimum amount of money that you need to make ends meet? This means that all your bills get their minimum payment and you can put food on your table. To figure this out for your family, you need to have a good understanding of your expenses and spending habits.
How do I figure it out?
Understanding your MVB is simple but can be time consuming. The best way is to do a spending audit. Take three months of your bank and credit card statements and categorize every penny that was spent. From there, figure out your fixed expenses. A fixed expense is a monthly bill that you can’t change without making a phone call. For example, your mortgage, strata fees, or phone bill. Your variable expenses are a bit harder to pinpoint. First, go through your variable expenses and figure out which you could completely live without for a few months. For example, eating out, clothing, or coffee shops. The last step is to figure out how much you can cut (if anything) from the remaining expenses. You could cut down on your grocery bill by eating vegetarian a couple nights a week or put your gym membership on hold. The remaining “must have” expenses are your MVB.
Why is it important?
The best way to prepare for the worst case scenario is to understand what that would look like for your family. What could you live on if you had to? Now that you know what your MVB is, the next step is to save that amount three or six times over to cover yourself in theevent of an emergency like a job loss.
Your #2 Number to Know: Net Worth
Ordinarily the term “net worth” conjures images of the exceptionally wealthy, yet everyone has a net worth. It is a simple number to calculate and is quite powerful, but most people are more likely to be able to quote the net worth of a celebrity before they are able to quote their own.
How do I figure it out?
Simple: add up all your assets and subtract your liabilities. Assets are defined as anything that has value, including but not limited to your bank accounts, investment accounts, real estate, cars, and art. Liabilities are defined as any money that you owe, including but not limited to your mortgage, credit cards, personal loans, overdrafts, and lines of credit.
Example Net Worth
Why is this important?
If you have no handle on your net worth, it may be negative without you even knowing it. Knowing your net worth will help you plan, determine how much debt you can afford, and motivate you to save more. I don’t know about you, but it makes me really excited to see my net worth go up a little bit every month as my debts are paid down and my assets increase in value.
While the very thought of numbers might give you high-school algebra flashbacks, they don’t have to be scary. You can actually save yourself some scary and stressful situations simply by taking some time to get a handle on your critical numbers.