Know what you have – asset / debt control

One of my earliest texts was published on my LinkeIn page trying to respond a question regarding when taking credit makes sense, and this post (including upcoming part 2)

intends to cover what I consider one of the most important things you can do over the long-run regarding your finances – and produces information you need for the credit question: control what you have and what you owe over time.

Background

It was almost 10 years ago that I noticed – even salary and expenses came in and out of the very same bank account – that not everything I had was easily under control when checking my bank statement. I remembered this one ‘ok’ I had given to a bank manager some years back to buy my first stocks – Banco do Brasil SA, by the way, I still hold on to those shares – so there was no one financial institution who could know how much I had into bank account plus current stock value since they were held by bank and a separate broker, so there was no other way than to check for myself and create my own control sheet.

Since then, this simple checking of ‘how much do I have right now’ has actually evolved into a regular monthly activity through which I make sure where my finances – and for the past few years those of my family – are heading.

Granted, most people will not have as many accounts in as many countries as I do – I’m still pending on a full count, which is definitely coming up in a future post – but I cannot overstate the advantages of having an overview of your financial situation regardless of what that picture actually looks like. Let’s adress this in the most common situations I’ve come across.

I have debt, which makes me fearsome of even looking at my finances

For those who actually have some form of debt weighing on their finances, the need to control your numbers is the most pressing. Well, unless you have a credit from a generous family member who doesn’t charge you any interests – which by the way is the kind of borrowing that shouldn’t be forgotten over a lifetime –  your debt will mean not only an obligation to repay the borrowed amount, but also to pay interests over it, and the final burden of the debt should be on your radar.

Photo by Helloquence on Unsplash

In essence, you are remunerating the money that was borrowed to you – as opposed to remunerating a service or making an expense you have control over – so your regular or future budget becomes tighter since this takes up from your availabilities.

Why is it so important to look at my finances, if the result I will find is so unatractive? I would recommend anyone with debt one of two things: either 1- make sure you consistently get better returns on your savings than in paid interests; or 2- get out of debt. To make sure you are on situtation 1, or to accomplish number 2, you need to get a grip on your finances! Knowing how much you owe and how much you have allows you, for instance, to make a repayment plan or calculate exactly the percentual cost of the borrowing, so please don’t miss out on doing that.

My financial life is too simple to be worth controlling

Having been an enthusiastic counterpart for finance-related discussions for many years, I have heard a lot of people mention their finances are just too simple because their income is predictable – disregarding how high or low – and they don’t have to many new extravagant expenses coming in.

For those who have relatively simple financial lives, be aware that instead of a handicap, this is a strong advantage which enables you to better control, plan and shift your finances in the direction you want.

Personally, I’ve been a conservative money manager all my life, and whereas at times I wondered if my habits weren’t too quiet when comparing with friends living crazily exciting (and expensive) lifestyles, it turns out that maintaining a regular surplus over a long period of time really give you the buffer you need to feel more financially secure. If at some point you want to buy a property, go on an expensive trip, or buy the car you really want – for example – your finances should be able to accomodate that, or at least you will know what you can afford more easily.

I only invest in property, finances are therefore not important to me

Given the current governmental zero-interest policy in Europe, I have also heard from some locals as an excuse that it’s not worth thinking about finance, since their sole financial concern was to buy property. This way – goes the argument – they would be unaffected by interests, yields and others, and therefore wouldn’t need to think about financial alternatives. Needless to say, this mindset is seriously misinformed.

First and foremost, all prices are one way or another influenced by macroeconomic policy, so the pricetag on your house or flat has everything to do with interest rates and finance, whether you are aware of it or not. Now, this doesn’t mean you need to become an expert on finance to buy a property – other elements such as neighbourhoods and how the price evolves over time in that given city as just as important – but please do not ignore that finances can be key to a property deal – especially because a large proportion of homes are bought using mortgage financing (which in turn reflects in prices).

Moreover, you shouldn’t forget that a property is an asset with financial value, so the ongoing decision to keep, rent or sell have all financially comparable alternatives, you can always do something else with your assets so knowing the opportunity costs can confirm or put a question mark on how well invested money in a given property or portfolio of properties actually is. This type of comparability is what finance enables, ultimately giving you better control and more knowledge of what you have, so for those with property, still do check your assets on a regular basis.

After some time saving, I have a very good idea of how much I have

And then we have those who do not worry about controlling debt nor think their asset base or financial life is too small or uncomplicated, but rather consider the finances are under grip.

Maybe you are completely right, and you don’t need any advice or help because your finances are doing fantastic, but I suspect you can still benefit from better monitor and control of your finances.

To all reading this far, and this group specifically, I invite to read the post coming up next week, in which the benefits I got while controlling my finances evolved over the years.

This is a first text divided on ‘Part 1’ / ‘Part 2’, don’t hesitate to get in touch with your impressions, and have a great start in 2018!