The cornerstone of your financial plan is your net worth statement. It is the starting point you use to measure your progress. If you don’t understand where you’ve started it’s hard to measure if you have been successful. It is like being on a ship without a keel: Your moving but you don’t know if it’s forward or in circles.
To illustrate this point, imagine you are planning an exotic vacation. Questions you want to ask yourself are:
- When will the vacation start?
- Where do I want to go?
- What type of vacation do I want?
- How much can I afford to spend on the vacation?
When you create your financial plan you need to ask yourself very similar questions. You’ll need to establish where you are now, where you want to be in the future, and what financial resources you will have when you get there.
Starting Your Financial Plan
Measuring net worth is like taking a picture: It is a snapshot of a point in time. The net worth statement is a snapshot of your wealth at a point of time and is used to measure your progress.
There are four reasons why you should measure your net worth:
- To establish financial discipline
- To create a strategy to achieve your goals
- To measure progress towards your goals
- To feel financially secure about your future
Use the statement to establish growth targets for your net worth. Often net worth will increase by paying down your debts or increasing your savings.
Calculating Household Net Worth
Net worth is the total fair market valueof all of your assets (house, stocks, bonds, mutual funds, GICs) less what you owe (mortgage, loans, credit cards). (i.e. what you owe).
Getting Started With Your net Worth?
To start, pul together all of your financial records, including:
- Latest tax records
- Bank statements
- Credit card information
- Itemized living expenses
- Brokerage statements
- Mutual fund records
- Mortgage documents and statements
- RRSP & pension records
- Loan repayment schedules
- Insurance policies
- Market value of any personal property
This list may appear daunting and is not by any means comprehensive.
What Does The Net Worth Statement Look Like?
Here is a sample net worth statement.
|Investments (at market value)
|Total Assets: $||Total Liabilities: $|
NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES
Now Measuring Your Net Worth Success
Your net worth at the end of the year should be compared to the end of the previous of the year.
- Was the growth rate expected?
- Do you need to take steps to accelerate the growth rate or maintain it?
- Is your net worth negative? Perhaps you need to get aggressive with debt reduction strategies.
- Consider other ways to grow your net worth.