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Discover Your Net Worth
Financial security may be a long way off but as you begin to take control of your financial future, you’ll find that many rewards accompany the sacrifices along the way.
Jonathan Pond, Your Money Matters
There’s a basic rule of life that goes like this: Before you can get where you want to go, you need to know where you are.
The most beautiful road map with all the scenic routes and best views clearly marked can be perfectly accurate, but if you can’t pinpoint your current location, it’s not going to do you a bit of good.
In the previous chapters, we’ve worked hard to create your financial road map. We started with the principles and values. We outlined and developed the basic elements. It’s a beautiful map, if I do say so myself. But until you have a good sense of where you are in relation to the “map,” you’ll have difficulty staying on course and measuring your progress.
A simple device will tell you exactly where you are today and will also serve as a measuring device so you’ll be able to gauge your progess in the months to come.
The Net Worth Statement
A net worth statement is a document that tells the difference between the value of what you owe and what you own.
A net worth statement shows your financial condition at a certain point in time. It shows how much money would be left right now if everything you own was converted into cash and used to pay off all that you owe.
Your net worth statement is an important tool because it helps you:
· check and measure your financial progress and how you are doing with reaching your financial goals
· make decisions about acquiring assets and taking on liabilities in the future
· estimate how well-off your family would be if you were suddenly taken from them
· determine your need for life and property insurance
· estimate what your income will be during your retirement
A net worth statement does not care about income. In fact, there is not even a place to record your annual salary. A net worth statement doesn’t care how much you spend on food, clothes, or education.
What your statement reveals is how much of your hard-earned income you have been able to hang on to. It confirms the belief that it doesn’t really matter how much money you make. You are worth what you save, not what you make. What matters is what you do with your money.
A net worth statement contains two categories: assets and liabilities—what you own and what you owe. When you deduct what you owe from what you own, the result is your net worth.
Assets
Your assets are your material possessions—everything from cash to investments, clothes to cars. Even those things you are in the process of paying off and do not yet own outright are considered assets.
Assets are divided into two categories: appreciating assets and depreciating assets. Appreciating assets are things you own that become more valuable over time. Everything else is depreciating.
Investments such as retirement accounts and stock market holdings are considered appreciating assets because they have the likelihood of increasing in value over time. Savings and cash come under the heading of appreciating assets, as does real estate. Certain collectibles appreciate, but be careful here. You want market confirmation of the values you set for your appreciating assets. You may believe your Beanie Baby collection is worth a lot more than what you could realistically sell it for next weekend.
Depreciating assets lose or decrease in value over time. Clothes, furniture, cars, boats, and electronics fall into this category.
On your net worth statement, list each of your appreciating assets and a corresponding value. For example, if your home would sell for $200,000 on today’s market, list your home as $200,000 under your appreciating assets. This is also where you will include the current value of your retirement accounts, certificates, stocks, bonds, and mutual fund shares. Use actual cash figures for cash on hand and in checking and savings accounts.
Include money owed to you as an asset but only if you are certain of repayment. For example, if you lent $1,000 to a friend at 8 percent interest and he has already repaid $300, enter $700 under appreciating assets. Do not include potential interest you will earn.
To find the current value of your investments, look for market quotes in a current newspaper or check the day’s financial markets online. You can get the current day’s value for each of the stocks and mutual funds you own by simply typing in the ticker symbol, which you can also look up online. Various websites, Yahoo Finance, for example (http://www.finance.yahoo.com), let you track your portfolio values. Of course, if you have an online account like eTrade, it’s all done for you.
Other possessions such as cars, big screen TVs, boats, clothes, and household goods are depreciating assets because they are becoming less valuable with time. Unless your car is a rare collector’s item (in which case it would be an appreciating asset), it is worth less today than it was yesterday. In fact, if you bought it new, it was worth 20 percent less the day after you bought it due to depreciation.
It is customary to group assets into categories such as real estate or personal property, which would include your clothes and household goods. Some experts suggest an estimate of $10,000 current market value for personal property including furniture, clothes, tools, and all other household items of a typical two-adult household. You may wish to use that figure or determine your own. If you have a lot of valuable furniture, jewelry, or collectibles, you can list them separately.
Liabilities
When it comes to a net worth statement, debt is debt. We make no differentiation between secured and unsecured debt. Any amount you owe another person or entity is accounted for under liabilities. These are obligations such as mortgages, home equity loans, car loans, automobile leases, student loans, personal loans, court-mandated child support (up to one year’s worth), leases, and contracts for things such as wireless devices and gym memberships—anything for which you have an obligation to pay. Following is a net worth statement showing both assets and liabilities. The example compares two nonconsecutive years for illustration only. You should prepare a net worth statement at least annually.
Net Worth
Subtract your total liabilities from your total assets. The result is your current net worth.
Your net worth tells a story. It doesn’t lie; it doesn’t deceive. The last number, the bottom line, reveals how much of your income you’ve managed to keep. If that is a negative number, you’ve managed to spend more than you’ve earned, relying on credit to fill in the gap. Or you can think of it this way: You’ve been spending all you earned plus a lot you haven’t even earned yet.
What you see on your net worth statement is your financial condition as of today. If you are discouraged by what you see, let me encourage you. You have control over this situation. As helpless or hopeless as you may feel right now, the truth is that this is a picture you can change beginning now.
Take another look at your net worth statement. Focus on one of your debts, like a credit card debt. Imagine that you will reduce that balance by $5 when you send your payment tomorrow. That will immediately increase your net worth by $5. Five dollars here, 10 dollars there is the way to get on board with changing your financial picture.
Perhaps the most important thing you can learn from this chapter is this: Reducing debt increases net worth dollar for dollar. A repaid debt is a good investment.
Your Assignment
Just as soon as practical, prepare your net worth statement. Do this work as accurately as possible. Inflating assets or conveniently excluding liabilities only hurts you. You need to know where you are so that you will be able to measure how you are doing as you begin to debt-proof your life.
You will be creating a benchmark against which to measure your progress. That will have a positive effect on your determination to become a better caretaker of your money. It is going to be exciting to plot your financial growth each year or, for the more diligent types, each quarter or month. Even your smallest efforts to repay debt and save money are going to get your attention when they will show up in black and white.