BY JOHN ELLIS
JUST as things get lost in a mess, a chaotic financial life makes it easy to lose track of where your money goes.
Calculating your Net Worth helps makes sense of your finances and can help ensure you are doing what’s best with the money you have.
In simple terms your net worth is the difference between what you owe (liabilities) and what you own (assets). If what you own exceed what you owe you have a positive net worth. On the other hand, if what you owe is greater than you own, you have a negative net worth.
Your net worth will fluctuate over your lifetime. Ideally it increases as you grow older, as you pay off loans, reduce or pay off the mortgage on your home, gain more assets.
At times over your life your net worth will fall, as for example, you begin to cash your savings for your childrens’ education, fund for retirement income.
But it is the overall trend that is important.
One of the challenges in calculating your net worth is allocating accurate values to all your assets. It’s important to make cautious estimates when placing value on certain assets so that you do not inflate your net worth.
Your home is usually your biggest asset. It can have a significant impact on your overall net worth. So, you need to determine an accurate value of your home by comparing it to similar homes in your area.
To calculate you net worth you need to calculate, at the least, the following:
Assets, anything of value that you own that can be converted into cash – investments, bank accounts, retirement funds, property and personal items like your car or jewellery.
Liabilities, your mortgage, loans, credit card debt, medical bills, outstanding tax liabilities! – October is coming!
Since each person’s financial situation and goals are unique, it is difficult to establish a generic “ideal” net worth that applies to everyone.
Instead, you with the help of your Financial Advisor will have to determine your ideal net worth by taking into account where you want to be in say five to ten years and/or when you retire.
When calculated periodically this net worth figure is helpful, as it can do two things; it lets you understand your current financial situation and it gives you a reference point for measuring progress toward your goals.
When you see your ‘financials’ increasing or decreasing in black and white, you are forced to confront the realities of where you stand financially and knowing your net worth helps you identify areas where you spend too much money.
Just because you can afford something doesn’t mean you have to buy it. To keep debt from accumulating unnecessarily, consider if something is a need or a want before you make a purchase.
Your net worth figures can motivate you to formulate a plan for paying down debt or save and invest money. If your net worth statement shows that you are on track to meet your financial goals, it can encourage you to continue what you’re doing.
But, if your net worth indicates room for improvement (for example, over time you have reducing assets and growing liabilities, it can provide a needed spark of motivation to take a more aggressive approach to saving and investing your money.
Finally, how often should you calculate your net worth. There is no set rule, but at least yearly and whenever you make a large purchase or sale, like a house or car. Email or call for further information – firstname.lastname@example.org. 0868362633.