Let’s focus in on step 2 of creating a plan (see my last post — Money Tip #3: Don’t Forget to Plan) to move toward financial independence:
Step 2: Analyze where you are now, include a list of your assets — things you own (don’t forget career assets) — and liabilities (things you owe), as well as the amount of money (from your budget) that you have available to put toward your goals.
Step 2 is essentially about creating a net worth statement. Your net worth is what’s left over after you subtract everything you owe from everything you own. If you haven’t calculated your net worth before it can be very scary and I often get questions like the following:
“Is it possible to have a negative net worth?†Yes, it is possible to have a negative net worth today but that doesn’t mean it has to stay that way.
“How often should I do this?†You should calculate your net worth at least once a year and the goal is to see it grow each year.
“How do I make it grow?†You can grow your net worth by increasing your savings, increasing the return on your investments, decreasing your debt, or a combination of these.
So let’s see where you stand. First make a list of everything you own along with the current market value of each item (what you could sell it for today), and then add it up. Some typical assets include: cash on hand (checking accounts, savings, certificates of deposit (CDs)) stocks, bonds, mutual funds, your house and cars, the cash value of life insurance policies, retirement plans, annuities, real estate and business interests, household furnishings, antiques, jewelry, coins, and artwork. In other words, anything of value you own that could be sold.
Don’t worry or stop if you don’t have the exact dollar amounts. Simply write down the amount you think you could reasonably sell each item for today.
Next, make a list of everything that you owe. Some typical liabilities include: loans (student, auto, installment), mortgages, credit cards, unpaid bills (medical, utilities, etc.), and taxes you owe (income tax, real estate taxes, etc.). Then subtract your total liabilities from your total assets and the remainder is your net worth.
If you have more assets than liabilities, you will have a positive net worth, and that’s a good thing. It means that you have a good base to start with. If on the other hand, your liabilities are greater than your assets, you will have a negative net worth, and while that is not the best thing, it’s important to know so that you can determine areas you need to work on to grow your net worth and your wealth.
Once you complete your net worth statement, consider any changes that might be occurring in the next year that could impact it, and then project your net worth for the coming year. For example, paying off a current debt will decrease your liabilities and increase your overall net worth. After you factor in all of the possible changes, set a goal to increase your net worth, either by a specific dollar amount or a percentage and develop a plan to get there. This last step is important because it means that you are being proactive in managing your money and setting goals to increase your wealth.
What was your experience when you calculated your net worth and what did you decide to do about it? Share your best tip for increasing your net worth.
Patricia Stallworth, CFP® and CDFA, is the president of PS Worth, a financial education company, the author of Minding Your Money, and the host of the Minding Your Money Minute™. Learn more by visiting MindingYourMoney.net.