Financial Literacy #1: It Starts With Your Financial Scorecard

This financial literacy series is aimed at covering the simple, foundational principles of personal finance. This can be helpful to young people or anyone who wants to take charge of money in their lives.

To begin, let's start with the big picture, the ultimate scorecard of your financial health: your Net Worth. 

Your Financial Scorecard: Understanding Net Worth 

Your Net Worth is a good measure of your financial position, and it's calculated using a simple personal balance sheet. It’s composed of three parts: 

  • Assets: Things you own that have value (e.g., your stocks, cash in the bank, your property).
  • Liabilities: Money you owe to others (e.g., your personal loans, credit card debt, home loan).
  • Net Worth: The value of your assets after subtracting all your liabilities.

Here's a simple example:

  • Assets: $10000 (Cash) + $50000 (Stocks Portfolio) = $60000 
  • Liabilities: $15000 (Student Loan)
  • Net Worth = $60000 (Assets) - $15000 (Liabilities) = $45000

Our goal will be to make this number grow consistently over time. Growing your net worth is a good indicator that your current personal finances are healthy and working for your future. 

Driving Growth with Positive Cash Flows

The engine of all wealth creation boils down to spending less than you earn. Positive Cash Flows (Savings) equals Income - Expenses. 

This surplus is the "seed money" for your financial future. It provides capital for you to pay down liabilities and purchase assets.  

My First Asset 

As a teenager, I received a "daily allowance" in the form of some cash put into my wallet. I made it a habit to always spend less than I received, and put the remaining cash into a biscuit tin for safe keeping. 

Years of this "boring" habit meant I had a significant amount of starting capital to invest. It’s proof that consistent saving, no matter how small the amount seems, is the true foundation of investing. 

 

Disclaimer: This blog post is for entertainment purposes only and does not constitute financial advice. Please do your own due diligence. 

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