Ask Melanie: a new year, a new financial plan
I'm determined to get on top of my finances in 2013. Where should I start?
Start by adding up the value of everything you own and everything you owe. Subtract what you owe from what you own. That number is your net worth. It's worth knowing as it's the basis for working out many other things.
For example: whether you can afford to quit your job; whether you should marry for money; whether you can afford a divorce; whether to take on more debt; and how much you need to save, and for how long.
Set out, accurately, what you own and what you owe makes up your personal balance sheet, also now known as a "statement of financial position" or SOFP. All values should be at the same date. This crystallises your position so accurate comparisons can be made among items, and with future statements.
SOFPs are usually prepared at the end of the calendar, or tax year, or for any month-end or quarter-end in between. My SOFP is updated on a strict basis at the end of each calendar year and on a discretionary basis, dependent on needs and time, each quarter through the year.
List assets in classes, starting with cash and fixed income, followed by property, shares, MPF, loans to others, and a final class for anything miscellaneous (Hong Kong residential lease deposits for example). Exclude personal effects such as jewellery and antiques unless they are of high value and can be sold to fund your children's education or your retirement.
Liabilities, or debts, are listed next to the relevant assets. Credit card debt and accrued tax liabilities, for example, are listed next to cash while mortgages are listed next to the relevant property. Use a common currency for all assets, but record the currency and prevailing exchange rate for individual assets.
Although software is available to assist with updating asset and liability values, a simple Word or Excel document is usually good enough for your personal SOFP. Keep it simple so you have a clear snapshot of your total position. Extensive shareholdings, managed funds, or property portfolios can be captured in a consolidated report that sits behind your SOFP.
Digging out details and current valuations for assets and liabilities first time around is the hardest and longest part but, once done, future updates are quicker. Cash, fixed income and listed assets such as shares and managed funds will have easily obtainable online valuations. Have a list of the relevant websites and passwords handy to speed things up. Many Hong Kong properties have easily obtained indicative values, but overseas properties may not, so you should make your best estimate.
You do not need to do all this, hung over, on New Year's Day. It's likely you can access year-end bank and financial institution valuations soon after the 31st, but I typically go online briefly to record bank and credit card balances, and exchange rates. You can start preparing your list of assets and liabilities, websites and access codes, in the lead-up to the new year.
Preparing an SOFP is a vital step towards getting on top of your finances. You can go from possible denial to full acknowledgement of your financial position. You will be able to identify areas where you may be at risk financially; for example, poor liquidity, asset concentration, investment underperformance, or interest and foreign exchange rate movements. Your SOFP is the basis on which you can develop strategies for financial planning.
You might also like to keep a summary of your net worth over successive year-ends to monitor progress in accumulating, and spending, your wealth.
The views presented are of a general nature. For specific advice, talk to a professional planner. See the column archive at scmp.com/askmelanie