The best investment ever is whichever one will shore up your balance sheet and increase your net worth. Often there are simple things you can do that will increase your net worth without requiring you to know anything about investing or the stock market.
I just finished a four-month gig on the TV show “Emily Owens MD” and I am going to walk you through exactly how I invested the extra income.
First you need to understand what a balance sheet is and how to make one. Fold a piece of paper in half. On one side write the word “liabilities” and list every debt you have in your life. On the other side of the paper write “assets” and list anything you own that either brings in money, or could quickly be converted to cash.
Now subtract your liabilities from your assets and you get your “net worth”. Is it a positive number? This is like your financial score card and I encourage everyone to create one and update it regularly. If you don’t keep score, how do you know if you are winning?
Here is my balance sheet from June 2012.
I am not too proud of this balance sheet. Although I had some assets, my liabilities side was too high for my liking.
The film industry was slow for the first half of this year and when I returned from my annual vacation, I was hit with a large HST/tax bill. Luckily I started work on Emily Owens at the beginning of August.
Here is my balance sheet today.
Although I did buy some shares of Apple when the price dropped 20%, you will notice that most of my “investing” was just paying off debt. My visa card charges 11.5% interest, so paying that off was like buying an investment with a guaranteed 11.5% return. Hard to find now days.
You will also notice there was a lot of “automatic investing” going on because of the way I have things structured. My car payment comes out automatically every month, 9% of my income is invested in mutual funds through my union every month and my Dividend Reinvestment Plans (DRIP’s) automatically buy me more shares every quarter.
It’s important to note that it doesn’t matter what side of the balance sheet you invest in, they both have equal effect on your net worth. Paying down $1,000 of debt (liability) has the same effect as paying $1,000 into your TFSA (asset). Either way, your net worth goes up by $1,000.
That’s why if you find investing confusing, you can always concentrate on paying down your liabilities while you read and learn enough to get started.
(to be continued…)