A financial reality check is a crucial first step to understanding exactly where you are with your money and how much work you still have to do to reach your goals.
You might discover that you’re already well on the path to a secure financial future, or you might discover you’re on shaky ground.
The journey to financial security starts with two important concepts;
- Your net worth statement, to assess what you own.
- The reality check, to assess your current financial situation.
The secret to a secure financial future is not the income from your job, but the income from the assets you own.
You will eventually stop working, but those assets will continue generating income for you.
So your goal is to use your income during your working life to increase these income-generating assets.
More to the point, it’s not just about increasing your assets, but increasing your net worth.
Net Worth = What You Own – What You Owe
Are you ready for your reality check? It’s time to be honest!
Start by identifying your top priority for your future – for example: financial freedom, time, helping others, and meeting people.
Understand why this matters to you, what it means to achieve it, and what it means if you don’t achieve it. This is often related to your purpose and values.
You might have heard that the average employee is only “two pay cheques from poverty”. That’s an exaggeration, but it’s uncomfortably close for too many people.
You need to discover your own “cash cushion”, which examines what happens if you suddenly stopped earning money.
- Do you have only one source of income of more than a few hundred dollars a week?
- If you lost that (main) source of income tomorrow, how long could you maintain your current standard of living?
- How long would you be able to survive without becoming dependent on government welfare or on family and friends?
Too many people spend their entire working life earning money, spending it all, and retiring with nothing except their superannuation.
- For how many years have you been working?
- How much are you currently worth in net income-producing assets?
In other words, how much money do you have invested in residual income businesses, investment property, shares or superannuation funds? Do not include the value of your home because it doesn’t create income for you.
You need to measure where you are now so you can make a realistic plan to take the next steps.
For some people, it comes as a rude shock to discover just how big a gap they have between their current net income-producing asset base and their desired net income-producing asset base.