When you embark on a trip, you probably have some idea of where you’re going and how you’ll get there. Your financial journey is no different. A key to financial success is to develop and track your Money Map. In today’s blog, we’ll walk through the 3 key components of a Money Mapping.
What is a money map? I use this analogy when I teach my financial planning course. I love to travel, and one of my favorite destinations is Charlottesville, Virginia. I try to visit this quaint little town at least once a year. Every time, at the start of my journey, I put “Charlottesville, VA” into Google maps, and it gives me these 3 route options:
Picking the Best Route
How do I know which route is the one I need? The easternmost is the quickest. It goes straight up Route 29, which is essentially a highway, and it only takes 3.5 hours to reach Charlottesville. As I get closer, there are some pretty rolling hills, and this route is efficient.
The westernmost route takes the longest, but is a really pretty drive through the mountains. It’s perfect for a warm, fall day when the leaves have changed and there’s time to stop and stop for the scenic mountain views.
The middle route offers a little of both–it starts out less congested than the highway, which makes for a pleasant drive, but includes some highway driving for efficiency.
Which path I take depends on the stops I want to make along the way.
But, I can only plan this route if I know where I am, where I’m going, and the experience I’d like along the way. Your money journey is no different. In order to map your journey, you need to know where you are now and where you want to be. You’ll pick the path that gives you the experiences you want along the way.
How do you clarify these key components of your money map? Read on to learn more.
Money Mapping Step 1: Determine Where You Are Now
How do you know where you are when it comes to money? In finance, we use a tool called a Net Worth Statement to determine where you are now and your overall financial health.
A Net Worth Statement…
- Lists all of all of your assets, which are items you own that have financial value. These include any liquid cash account like checking and savings accounts, investment accounts including retirement accounts, and real estate.
- Lists all of your debts. This is any money you owe to others including credit card debt, auto loans, student loans, and home mortgages.
- Reveals your net worth, which, using our mapping analogy, is where you are now. To calculate net worth, subtract your total liabilities from your total assets. This number you get is your net worth and represents where you are now.
What Does Net Worth Mean?
Ideally, your net worth is positive. This means you have more assets than liabilities. If it’s negative, then you have more debt than assets, and over time, you want to begin reversing this. It’s not unusual to have negative net worth early in life because we often need to take out some loans to fund necessary expenses like education and purchase of an auto and home, and we haven’t had time to build assets yet.
Over time, however, you want your net worth to grow, eventually reaching a point where you have sufficient assets and no debt. A key component to retirement is having a high enough net worth that your assets can sustain your needs thereby allowing you to reduce or eliminate the need to work.
It Just Takes 15 Minutes a Month…but is Priceless
Tracking your net worth takes about 15 minutes a month, but it reveals valuable information about your current financial state and your progress. Read our article, Financial Foundations 1: Balance Sheet for more information on how to create and track your net worth using a balance sheet.
That brings us to the second component of money mapping.
Money Mapping Step 2: Determine Where You Want to Be
The Ultimate Destination
For most of us, the ultimate destination is retirement. Equivalent to my example of Charlottesville, retirement is the destination of the last phase of life. I’ve been to Charlottesville enough to know exactly where it is and what it looks like. When I plan a trip there, I have a good sense of what I want to do, where I want to eat, etc.
What Do You Envision?
What will your retirement to look like? What will you do during retirement? Where will you live? Is it a time when you completely stop working? Will you work part time? Will you explore new hobbies or turn a hobby into a stream of income? Will you travel? Volunteer? Spend time with family? What does this phase look like for you?
It’s OK if it’s not be completely clear now. It will be over time.As you think through these qualitative questions, read more in our blog, Planning for Retirement, Part 1.
How Will You Make it Happen?
This is where the numbers come in. Now we start thinking about how to fund this phase.
Two Ways To Fund Retirement
There are two ways to access the money you need to turn your retirement vision into a reality.
- Assets–Over time, you can build assets that you can then sell in order to raise cash for your expenses. Many of us contribute to retirement accounts and then periodically sell the investments in the accounts so we can pay our bills. If you’re growing a business and own property, you might be able to sell the business or the property and use the proceeds for your needs. If you sell the assets to produce cash, you won’t own it anymore.
- Income–You can also produce streams of income to fund your expenses. The most common stream of income in retirement is social security. Pensions are another, less common, form of retirement income. You could also work part time to produce income. If you have been building a business, rather than sell it, you could hire someone to manage it and benefit from the continued income it produces. That way, you keep the asset but have a source of income from it to pay your needs.
You don’t have to pick one or the other; you can create a plan that includes recurring income and the use of assets. Either way, it’s important to have a clear understanding of the amount of assets and income you’ll need to fund your retirement vision. Read, Planning for Retirement, Part 2, for more information on retirement funding.
Once you know where you are and where you want to be, it’s time to plan the journey (and the stops along the way).
Money Mapping Step 3: Plan Your Journey
Which Google maps route will you take on your life’s journey? Sometimes, in the day to day, life happens so quickly, you can easily become a passive passenger. However, if you take a moment to take stock of where you are and where you want to be, you’ll be able to better shape your journey.
Oh, The Places You’ll Go
Ready to plan your route? This is where you begin to plan the stops along the way. Often in financial planning, we’re very focused solely on retirement planning, and we don’t put attention to our life’s journey. Money Mapping is all about creating a meaningful and fulfilling life while we focus on that destination.
Developing a Vision
So, how do you develop that vision? I recommend finding a quiet place where you can thinking and reflect. It could be a coffee shop, a picnic blanket in a local park, or a quiet place in your home. It doesn’t matter when or where as long as it’s a place that allows you to feel calm, happy, and gives you the quiet you need for a few hours.
I structure my reflection after Stephen Covey’s instructions in his book, The Seven Habits of Highly Effective People. Covey details four areas of health: physical, spiritual, social, and emotional. During my self-retreat, I reflect on how healthy I feel in each area, what is supporting that health, and what would need to change in order for me to feel more healthy.
From here, I develop a list of areas I’ll focus on to increase my health. Some of my needs over the years have been to spend more time with family, declutter my house, go back to school, and travel more. Some financial goals have been to fund my daughter’s education, create sources of income through the purchase of real estate. For more guidance on gaining clarity on your life vision, read our blog Inspiration for Your Life Vision.
Now that you’ve clarified your goals, you can develop a plan to achieve each. You have focus and can steer your life in a fulfilling direction.
Your Complete Map
This blog has been an introduction to Money Mapping. By understanding where you are financially and where you want to be, you clarify the two foundational pieces to your financial health. From there, determining the route you’d like to take ensures that you’ll intentionally create a meaningful life. How do you envision your life’s journey and what are the fulfilling stops along the way? Clarifying these goals allows you to create a concrete financial and life plan that incorporates both the journey and the destination.