Determining Your Financial Net Worth
To Determining Your Financial Net Worth, you need to know your financial net worth is an important barometer of your monetary health. Your net worth indicates your capacity to accomplish major financial goals, such as buying a home, retiring, and withstanding unexpected expenses or loss of income.
Your net worth is your financial assets minus your financial liabilities:
Financial Assets – Financial Liabilities = Net Worth The following sections explain how to determine those numbers
A financial asset is a real money or an investment you can convert into your favorite currency that you can use to buy things now or in the future. Financial assets generally include the money you have in bank accounts, stocks, bonds, mutual funds, and exchange-traded funds, which deal with investments). Money that you have in retirement accounts (including those with your employer) and the value of any businesses or real estate that you own are also counted.
I generally recommend that you exclude your personal residence when figuring your financial assets. Include your home only if you expect to sell it someday or otherwise live off the money you now have tied up in it (perhaps by taking out a reverse mortgage. If you plan on eventually tapping into the equity (the difference between the market value and any debt owed on the property), add that portion of the equity that you expect to use to your list of assets.
Assets can also include your future expected Social Security benefits and pension payments (if your employer has such a plan). These assets are usually quoted in dollars per month rather than as a lump sum value.
Your Financial Assets Table
|Savings and investment accounts (including retirement accounts):|
|Example: Bank savings account||$5,000|
|Benefits earned that pay a monthly retirement income:|
|Employer’s pensions||$_________ / month|
|Social Security||$_________ / month|
|Total Financial Assets (add the two subtotals) =||$_________|
To convert benefits that will be paid to you monthly into a total dollar amount, and for purposes of simplification, assume that you will spend 20 years in retirement. Inflation may reduce the value of your employer’s pension if it doesn’t contain a cost-of-living increase each year in the same way that Social Security does. Don’t sweat this now — you can take care of that concern in the section on retirement planning in.
Consumer items — such as your car, clothing, stereo, and so forth — do not count as financial assets. I understand that adding these things to your assets makes your assets look larger (and some financial software and publications encourage you to list these items as assets), but you can’t live off them unless you sell them.
Subtracting your financial liabilities
To arrive at your financial net worth, you must subtract your financial liabilities from your assets. Liabilities include loans and debts outstanding, such as student loans, credit-card and auto-loan debts. When figuring your liabilities, include money you borrowed from family and friends — unless you’re not expected to pay it back!
Include mortgage debt on your home as a liability only if you include the value of your home in your asset list. Be sure to also include debt owed on another real estate — no matter what (because you count the value of investment real estate as an asset)
Crunching your numbers
Go ahead and write in the spaces provided, unless you plan to lend this book to someone and don’t want to put your money situation on display.
Now comes the potentially depressing part — figuring out your debts and loans in the table bellow
|Example: Bank Credit Card||$4,000|
|Total Financial Liabilities =||$_________|
Your Net Worth
|Find||Write It Here|
|Total Financial Assets (from first Table above)||$_________|
|Total Financial Liabilities (from second Table above)||– $_________|
|Net Worth =||$_________|
Interpreting your net worth results
Your net worth is important and useful only to you and your unique situation and goals. What seems like a lot of money to a person with a simple lifestyle may seem like a pittance to a person with high expectations and a desire for an opulent lifestyle.
You can crunch numbers to determine your financial status more precisely for goals such as retirement planning. I also discuss saving toward other important goals in that chapter. In the meantime, if your net worth (excluding expected monthly retirement benefits such as those from Social Security and pensions) is negative or less than half your annual income, take notice. If you’re in your 20s and you’re just starting to work, a low net worth is less concerning and not unusual. Focus on turning this number positive over the next several years. However, if you’re in your 30s or older, consider this a wake-up call to aggressively address your financial situation.
Getting rid of your debts — the highest-interest rate ones first — is the most important thing. Then you want to build a safety reserve equal to three to six months of living expenses. Your overall plan should involve getting out of debt , reducing your spending, and developing tax-wise ways to save and invest your future earnings.
In this series you can also read Easy Rules Of Your Credit Score And Reports.