Why You Need to Know Your Net Worth

PHOTO: You cant reach your financial goals if you dont know what your net worth is.

To get ahead financially and plan for retirement effectively, it’s critical to get a handle on your total current financial condition. The best way to do this is to create a personal balance sheet that shows your net worth — the sum total of everything you have and everything you owe.

A balance sheet is nothing more than two columns of itemized figures, with the value of each asset on one side of the page and your debts on the other. Subtracting the total of one column from the other yields your net worth. When financial experts talk about growing your wealth for retirement, they actually mean increasing your net worth. After all, what good does a lot of “wealth” do you if you’re dragged down on the liabilities side of your balance sheet by a lot of ugly, interest-compounding debt?

Everything you own and owe matters on this balance sheet because retirement typically means a move from the phase of life when you have a paycheck and are, hopefully, growing your nest egg to the phase when you’re are gradually cashing in this nest egg to pay expenses during retirement. This fundamental change will probably mean selling your home — the one where you raised your children — and buying a smaller, less expensive retirement home, condominium or townhouse and putting the leftover cash into retirement accounts.

During retirement, most people need about 20 times the amount they spend each year (which is everything post-tax, minus money saved and invested) to be positioned for retiring in their mid-60s with some assurance that they won’t outlive their resources. Your personal financial situation is really no different than the profitability or lack thereof in a business. In both, the proprietor wants to show increasing profit after expenses over time. Primarily because of debt from education loans, the net worth of many individuals (including some with good incomes) is negative in their 20s and 30s. The goal is to pay off this and other debt and invest for retirement, increasing net worth, as you get into your 40s and 50s, when you may be paying for your kids’ college education; this debt should be retired long before you do. As you grow older, your net worth figure should be driven less by your liabilities and more by your assets.

Here are some things to keep in mind when assembling a personal balance sheet and analyzing it for opportunities to increase your net worth:

  • Look for low-growth assets that can be cashed in to pay off high-cost liabilities – always a good move.
  • When listing the value of your investments, take a minute to look at how much these values have fluctuated in recent years because of market volatility. Maintaining an investment portfolio with low volatility is critical to getting investment returns that grow your net worth because of the time it takes to compensate for down periods; playing catch-up is hurtful.
  • Assess whether investments seem more appropriate in structure and time horizon for cashing in in the short term — for use in the next three to five years paying college expenses for your kids, taking a trip or other goals — or in the long term to pay expenses during retirement 10 or even 20 years away.
  • Page
    • 1
    • |
    • 2
Join the Discussion
blog comments powered by Disqus
 
You Might Also Like...