Car

12,000

Car loan

7,500

Bank account

-1,500

Credit card #1

6,000

Pension* (company)

65,000

Credit card #2

500

ISA

1,000

Premium Bonds

500

Total

327,000

Total

189,000

Net worth

£138,000

* The assumption here is that this is a defined contribution pension – see Chapter 6 for the definition and the differences in pension types.

Figure 3: Figuring out your net worth

This exercise might be an eye opener in itself and possibly a little scary, particularly if you’ve been avoiding facing up to the reality of some debts or loans. If you’re in a relationship, this is also the point at which you need to decide whether to do this as a couple or as individuals. Just be mindful of what’s in joint names and work out the figures accordingly. An important point to note here is to remember where you got the data from, as this is something you should be doing at regular intervals so that you can keep track of your progress. Technology has massively helped here, so take the time to register for online banking access so that you can easily get an updated balance with a few clicks. It will be more accurate than relying on an annual paper statement and will help you see changes more quickly. I believe (and suggest) you should track this every month (quarterly at a minimum), which is not too onerous once you get into the habit – but it’s up to you. Put a date in the diary (first Saturday of every month?) and set some time aside to do it.

This aligns with my appreciation of Japanese production methods, in particular the process of continual improvement, or what’s become known as Deming’s wheel (aka the PDCA cycle): Plan, Do, Check, Act. In our situation, or in financial terms, the approach could be defined as:

Plan: know your overall goal, understand your spending and earnings.

Do: implement changes to your spending and earnings.

Check: track your progress against your overall goal every month, or at least quarterly.

Act: make changes to your actions if your original actions are not reflected in your results towards your goals.

Step 4: Know what you spend (and what you earn)

Much like working out your base financial position, you also need a good picture of what you spend in a given period. Again, this is likely to be another eye opener so you need to be honest with yourself (or yourselves) and not hide anything. As above, be sure you’re consistent about whether you’re doing this as individuals or as a couple. Historically, this would mean wading through a year’s worth of bank or credit card statements, not to mention chequebook stubs, but it’s much easier now to get downloads and either print them or put them into a spreadsheet.

You need to do this at least once a year, as some expenditure is annual (eg Christmas, birthdays or servicing the car) whereas other spending is more consistent throughout the year. If possible, it would be better to analyse two years (or even three – but you won’t get much additional insight beyond this). Don’t be tempted to ignore exceptional items unless you know they really are one-offs and unlikely to recur in the next five years or so. Once you have your data, convert it into a monthly figure.

You can tailor the list to suit (for example, you might have child maintenance payments or school fees) but I suggest using the list below as a starting point. Note that the last category is ‘unknown spending’ – this is typically cash you withdraw and have no idea where it actually goes. I’m not particularly against using cash but I much prefer using a card so that I can track my spending.

mortgage or rent

insurance (life, house, car)

bank or credit card fees/interest

council tax

utilities (water/oil/gas/electricity)

household/garden maintenance (including buying new appliances)

food (home groceries from supermarkets, including household consumables)

food and drink (eating out at restaurants/pubs)

phone/broadband/mobile

TV licence and subscriptions

other subscriptions (gym, magazines)

clothing, healthcare and beauty

holidays and days out

car and transport costs (loan payments, petrol, servicing, train fares)

gifts and presents

unknown spending