In my last post, I talked about the struggle a surviving spouse has when they realize that they are now on their own financially. I talked about how couples make their goals and plans with a “we” and “our” perspective and how difficult it is to adapt to flying solo.
I mentioned that this adjustment can take time to get used to. If you’re feeling that way, don’t worry, that’s normal. Don’t feel like you have to rush to making any major decisions. But during the first year, you can take some steps to help your transition.
One of the first things I suggest, is to take stock of your financial position. Think of it in terms of a journey you’re about to embark on. When you venture into unfamiliar territory, it’s a good idea to make sure you have your bearings straight. If you know where you’re starting from, you can then determine where you want to go, or where you must go.
In the process of settling the estate of your spouse, you’ve hopefully gone through (or will soon go through) all of the most recent financial statements from your various accounts. If so, you’ll have an impression of your financial picture. But, that picture might still be out of focus. Let’s sharpen the image and getting a clearer snapshot of your net worth and your cash flow, two important measurements of your financial well-being.
Net Worth
Net worth is an indicator of financial health. Basically it’s a check on what you own vs. what you owe. If you own more than you owe, that’s a good thing. If you owe more than you own, that’s not so good.
Companies use “balance sheets” to measure this element of their business. You can too. I’ve provided a simple, printable version of a personal balance sheet for you to use here.
To calculate your net worth, first add up the value of all your assets — the stuff you own. Do an inventory of your physical assets like your house and car, plus financial assets like your savings and investment accounts. Then, you add up all your liabilities — the amount of debt you have. This would be your mortgage, outstanding loans and credit card bills, etc.
When you’ve added everything up, you subtract the value of all your liabilities from your assets to get your net worth. Hopefully you have a positive number. If it’s a negative number, that means you owe more money than what your assets are worth and you’ve got some work to do to get back to climb out of that hole.
As I said, calculating your net worth provides an indication of your financial health at this point in time. That means the number is changeable. If you’re not happy with your net worth, work on improving it by either paying down your debt faster, and increasing your assets (more on this in future posts).
Your net worth will look different depending on the stage of life you’re in. In your working years as you pay down your mortgage and sock money away into your savings, your net worth should go up. During retirement, it’s common to see your net worth go down as you draw on your savings and sell off assets to fund your lifestyle when you don’t have a pay cheque.
It’s not unusual for a person to have negative net worth in the early part of their life. Student loans, a mortgage, auto loans, and such make it difficult in early adulthood to have a positive net worth. Over time, that number should improve if you manage your affairs prudently.
Generally speaking, as a widow (regardless of your stage in life) you’ll want to see a positive number when you’ve done the calculations. If it’s negative, you may have to make some tough decisions in the coming weeks and months.
Cash Flow
Cash flow is simply the amount of money moving in and out of your bank account each month. Having a positive cash flow means that your income exceeds your expenses and you’ve got a cushion of “free cash flow”. This extra money can be used to accelerate payments on your mortgage, pay down other debt, increase your savings, or purchase more assets.
If you have negative cash flow, that means your income is unable to cover expenses. Don’t panic if you’re there right now. Most people experience this, at least on a short-term basis, at some point in their life. But, if this is a chronic situation, it’s a sign of real financial problems. Paying for necessities by using credit cards or other debt should be a rarity, not a regular method of managing your monthly expenses.
Businesses use an “income statement” to measure their cash flow to gauge whether they’re bringing in enough revenue to cover their costs. They also use it to compare income over periods of time to see if it’s improving. As part of our resources, I’ve put up a printable personal cash flow template to help you do your own assessment which you can find here.
If you have a personal financial planner, you may have already done a calculation of your net worth and cash flow since the passing of your spouse. If you don’t have a financial planner, I’d highly recommend that you take the time to complete a personal balance sheet and cash flow assessment on your own. Doing so will help you visualize your overall financial health. It’s a good idea to go through this exercise at least once a year.
If your net worth and cash flow is positive, you’re probably doing fine. If either or both are negative, there’s work that needs to be done to improve your situation. In this case, you’ll want to first focus on getting your cash flow to a positive number. By doing so, you’ll be able to take that excess cash and pay down debt and add to your savings which will ultimately improve your net worth.
Again, don’t panic if you’re not happy with the way your numbers look. These calculations are a snapshot of your status at this point in time. It doesn’t mean you have to be stuck there forever. Improvement can come by taking concrete action. I’ll be discussing ways to improve both your net worth and your cash flow in future posts.
