April 23, 2008

Household Net Worth Planning: The Cornerstone Of Personal Finance

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?

In establishing your financial plan you need to ask yourself very similar questions to establish where you are financially, where you want to be in the future, and what financial resources you will have when you get there.

The cornerstone of your financial plan is your household net worth statement. It is the starting point you use to measure your progress to your destination. If you don’t understand where you 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.

The Starting Point

Measuring net worth is like taking a picture of you at a point in time. The net worth statement is a snapshot of your assets that will grow over time and used to fund your future needs such as when you are in retirement. There are four reasons why you should measure your household net worth:

To establish financial discipline
To create a strategy to achieve your goals
To measure progress towards your goals
To fee financially secure about your future

Use the statement to establish growth targets for your net worth. Often your net worth will increase by paying down your mortgage, increasing your savings, or changing jobs.

Calculating Household Net Worth

Simply stated household net worth is simply the total fair market value of all of your assets you own such as your house, stocks, bonds, mutual funds, GICs (i.e. what you own) less your liabilities such as your mortgage, and loans (i.e. what you owe). The result is your net worth.

What Do I Need?

Start by pulling together all of your financial records:

Latest tax records
Bank statements
Credit card information
Other itemized living expenses
Brokerage statements
Mutual fund records
Mortgage documents and statements
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. However, once assembled it will help you calculate your net worth and help you lay the groundwork to begin planning for risks, savings, debt, investments, tax, retirement, and estate planning.

What Does The Net Worth Statement Look Like?

The statement can really take any for you like. Accountants (such as myself ) like to create statements that look like a balance sheet from a business. But use what works best for you and the format does not matter.

ASSETS	LIABILITIES
Liquid Assets Checking & savings accounts Money market funds Other	Short Term Current bills Credit card balances Personal loans (the balance owing)
Short-Term Investments CD’s Treasury bills Cash value of life insurance Other	Long Term Mortgage Life insurance loans Investment loans Other
Investments (at market value) Stocks Bonds Mutual funds 401k/IRA accounts Profit sharing accounts Business shares Limited partnerships Other
Personal Assets House(s) Cars and other autos Personal property (i.e. your mothers antique china) Other
Total Assets: $	Total Liabilities: $

NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES

Now Measuring Your Net Worth Success

Your household 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.

Do You Have A Question?

If you have a question about this article, please feel free to leave a comment in the box below. Your comments and questions are welcome and help others.

Filed under Financial Planning