Take Stock of Your Current Financial Picture
Finding a good path to your destination is difficult if you don’t know where
you’re starting. During uncertain economic times, one of the first steps
to meeting your major financial goals is to find out where you are now. A net
worth statement is a great tool to find out where you are financially. As soon as
you know where you are, you can compare that to where you want to be.
Prepare a Net Worth Statement
You may think of what you own and what you owe as the most important
parts of your financial life, but it’s the combination of the two that truly matters.
If you have $1 million in assets, that sounds like a lot. But what if you
also owe $930,000 in mortgages, student loans, and credit card debt? The
difference between your assets and your liabilities is your net worth, which is
what gives you stability in times of financial uncertainty.
You can think of your current net worth statement as the You Are Here
sticker on your financial map. Your net worth statement summarizes what
you own, what you owe, and what would be left if you paid off everything you
owed. Assets include money, investments, your house and furniture, your
car, other real estate, and anything else you own. Liabilities include your
mortgage, car loan, other loans, what you owe on your credit cards or other
accounts, and any other amounts you owe to others. Here’s how to find your
net worth:
Net worth = assets – liabilities
To meet many of your financial goals, you need to increase your net worth,
either by increasing the amount of assets you have or by reducing your liabilities.
A regular review of your net worth statement tells you a lot about how
you’re progressing. For example, you’ll be able to see the following:
- If you’re increasing your assets through saving or decreasing your
assets through spending
- Whether your invested assets are growing at the rate you expect
- How you’re progressing toward eliminating your debt
- Whether you’re drawing down your assets too quickly during retirement
or whether you’re able to afford that month-long European cruise after
all
Preparing the net worth statement isn’t difficult; it just takes a bit of time and
access to your financial statements. If you use personal finance software like
Quicken or Microsoft Money, much of your net worth statement is available
to you already.
Use the Net Worth Statement
to Reach Your Goals
Tracking your net worth over a period of time can help you weather the ups
and downs of an uncertain economy. By looking at the big picture, you don’t
get as discouraged when an investment stumbles if other investments are
still gaining in value. Knowing that a bump in the road doesn’t mean you’ll
never reach your goal can help get you back on track to meeting your longterm
financial goals.
How does this work? Don’t simply complete one net worth statement and call
it a day. Here’s how to look at your net worth:
1. Commit to how frequently you’ll calculate your net worth.
This can be quarterly, semiannually, or annually. More frequently than
quarterly is overkill; less frequently than annually may put you far off
course when you do review your position.
2. Calculate your initial net worth.
3. Calculate your net worth at the next calculation period.
4. Compare the changes in assets, liabilities, and overall net worth.
Are you getting closer to your goals or farther away from them? Make it
a point to understand the general direction of each category. Are your
assets lower now because your investments are down with the market?
Or are your investments down while the market is up? Are you spending
more than you’re earning and depleting your assets to cover your living
expenses?
5. Identify where you have control over improving your financial direction.
6. Plan actions to increase your net worth before the next review period.
Tracking your net worth periodically through the ups and downs in the economy
can help you to keep from losing sight of the financial progress you’re
making.
