You Have to Cast a Net to Catch Your Worth
As we have seen in our last 3 posts covering Talent 2 Cash Management, Your Cash Flow is King and Let Your Savings Grow proper cash flow management and organization will increase your capacity to save. In my post Your Cash Flow is King we took the time to look at theCash Flow Statement as a means to orient ourselves as it related to budgeting and saving. In this post I will introduce the Net Worth Statement as a tool that underpins the Wealth Management Process. By seeing our current net worth and periodically evaluating it we can see if we can see if our cash flow, saving and investment strategies are working in unison to accomplish our goals.
The Net Worth Its Weight In Gold
Your Net Worth is the total market value of all your assets minus the total market value ofyou’re your liabilities and this gives you an accurate picture of your current fiscal shape. Assets include such things as stocks, properties, mutual funds, fixed income and cash on hand while liabilities include outstanding bills, car loans, mortgage, credit card balances and any other liabilities. Let’s take a quick look at how the net worth statement can assist in planning and tracking your goals as you go through the process of financial refinement.
The net worth statement is designed to help you take an objective look your current financial standing. I like the analogy of calories per day and body weight as the Cash Flow Statement helps you see how many calories over the year you are burning or accumulating and the net worth statement is simply the scale that tells you your weight at any given time. In a fiscal sense you want to be gaining weight (net worth) or have a surplus of calories positive cash flow). The positive cash flow helps you gain net worth but obviously the opposite objective is important when it comes to your physical conditioning as you want to lose weight and reduce calories. Just as a scale helps you on your journey to physical fitness the net worth statement is the first step towards establishing financial discipline. The statement assists tremendously with setting up an appropriate strategy to help you achieve your future investment targets. By measuring your fiscal weight at regular intervals, you can fully track your progress towards financial fitness. I think the greatest advantage of the net worth statement is that it provides you with confidence related to your financial security and helps you to get enthusiastic about your future accomplishment.
To calculate your net worth, you will need to pull together all the required financial records as these documents will help you do the groundwork toward achieving your goals in budgeting, saving, investing, and general tax and risk management. You will want to pull out the following information to assist in your net worth calculation.
- Loan reimbursement timetables for automobile, big-ticket items purchased on credit and Credit Card Statements.
- Real Estate closing records/recent updated evaluations on real estate value.
- Mortgage repayment documentation and property and school tax evaluation.
- Property insurance policies indicating replacement value of personal property.
- Income Tax Returns
- Bank Account Statements
- Mutual fund, Brokerage account and pension account records.
- Other itemized property or liabilities that would impact your net worth.
Preparation is Emancipation
The snapshot of current assets provided by the net worth statement is very beneficial in providing you with a starting point for your journey. You need to look beyond the current state of your finances and visualize how your net worth will grow overtime and how it will be used to fund your future spending needs like retirement. By calculating your net worth regularly, you ensure that it is moving towards your end goal. Below are a few points that will assist you in setting an annual net worth goal.
• By utilizing the cash flow statement and by increasing your income and cutting your fixed and variable expenses you can develop a tailored strategy to meet your net worth goal.
• Remember to review your annual net worth goal to ensure that you are optimizing your strategy.
• Regularly confirm that specific benchmarks are on track to achieve your goal. An example to this would be if you set your savings goal at 10% of your net income as this ensure that if you meet this goal your net worth should also be increasing by the amount projected.
The Next Worth Statement Explained
In this section we will break down the Net Worth Statement in order to flesh out in more detail related to the different components to make it a more useful tool for the community to utilize. The statement itself is made up of 2 section which consists of your assets and liabilities so lets take a quick look at these.
- Liabilities are formed because of a contract between a borrower (debtor) and a lender (creditor) and this contract defines the rights and obligation of each party. As a debtor you agree to pay back to the creditor the principal and interest to have access to use these funds. These debts can be broken down into two timeframe mainly short term which is under 1 year in length and longer term which is anything over 1 year.
- Assets can be defined as things that have value and can be sold or exchange for other valuable consideration. There are three categories of assets that are worth considering for our net worth calculation.
• Investment Assets: Investment assets are generally divided into asset classes such; fixed income, or bonds and equities, or stocks. These securities are designed to generate a profit for the holder or owner although profits are never certain, and volatility of the different asset classes differ in terms of their risk reward payoff. Investment assets can be broken down into short-term investments which are lower risk lower reward higher liquidity assets, and long-term investment assets that are higher return higher risk and less liquid as the asset cannot be sold for a certain time-period without substantial penalties.
• liquid assets are assets that can be quickly liquidated into cash with a negligible impact on the price received for the asset in the open market. Examples of this type of asset are cash, bitcoin and other cryptographic currencies, savings accounts certain money market funds.
• Personal Assets include your residence and vacation homes, any vehicles or personal property you may own.
Recap to Close Out
• By subtracting your total liabilities from your total assets, you are provided with a snapshot of your net worth. You should always recalculate your net worth at regular intervals to ensure that you are continuing to progress toward your goal.
• You will either meet or fail to meet your targeted goal for the growth of your net worth, and you need to ensure that you develop strategies to set a realistic net worth growth rate for your life circumstances. If you have a negative net worth growth rate you will need to focus on higher investment return and debt reduction and set a revised goal considering the financial hardships that you may be experiencing.
• If general asset prices increase for your investments and real estate but you have a neutral cash flow you will still see a growth in your net worth. A neutral cash flow can still increase your net worth if you are paying down debts. When you pay down your mortgage balance and your home grows in value you are increasing your net worth by combining debt reduction and asset price appreciation.
In conclusion, as I mentioned at the beginning of this post the primary way that your net worth grows is with positive net cash flow that leads to a greater savings combined with positive investment value growth. Now that we have a realistic picture of our fiscal shape and we know what steps we can take to increase our net worth, we can now move onto how we can approach investing so as to contribute to our prosperity and also that of our community.
Everything that implies a work activity that generates income without harming the neighbor, should not be synonymous with maldicón but quite the opposite, the humblest man sleep in peace and live much better and is a being full of peace, on the contrary that has much money without peace and with a tormented soul ...
Thanks for interesting story
Thank you very much for your thoughtful commentary and I could not agree with you more. In my most recent post Your Wealth Management Process I try to stress that qualitative goals and aspirations are primary to quantitative or financial goals. For what good is it if you have all the money in the world yet nothing you love to do with it.
every body should do financial planning
This is very very helpful and gives insight really and the need to do introspection into how one is doing financially. I'm gonna go through that financial document and test my net worth. I must say this is something I've thought of before but not really in a sense of actively checking my own net worth. Thanks for this resource, like you are saying it is very important to be checking it regularly, and gaining weight...in this area. I liked that analogy lol.
Thank you greenblossom for your feedback and I happy to see that you will make use of the resource. Self Control is useful in all aspects of our lives and financial self control is akin to saying no to that second piece of cake :) Stay tuned as the series will outline what you can do in a more specific way to organize your financial life.