Figuring and Examining Your Net Worth
Your net worth statement is simply a listing of all that you own and all that you owe. The difference between what you own and what you owe is your net worth. Your net worth is like a financial report card because it reveals a lot about you. In fact, people tend to be more comfortable talking about their sex lives than their financial lives. No one can prove whether someone has been a fantastic lover. However, one glance at a net worth statement, and you have a pretty good idea whether a person has made a lot of financial mistakes, had terrible misfortune, has been a fantastic money manager, or is just darn lucky.
Figure out your net worth now (using the Statement of Financial Worth worksheet provided), and update it each and every year, shortly after year-end, because that is when you receive the previous year’s year-end statements on your mortgage, retirement accounts, pension, investments, bank accounts, and a slew of tax-related documents. This is an excellent time to update your net worth statement.
Don’t beat yourself up over your current financial situation. It does no good; in fact, it actually is very harmful. Consider this the beginning of your quest for financial freedom. The only things that matter are the decisions you make in the present and the future regarding your financial life. You can’t change the past.
Your net worth becomes a benchmark that you can use to measure your current financial status relative to others, relative to where you want to be, and year to year. Your result from the previous worksheet becomes your first entry in your net worth tracking log.
You’re probably wondering how to interpret all those numbers from these worksheets. Well, here are a few general guidelines to keep in mind as you think about your net worth statements:
Personal Use Assets aren’t working assets like Investment Assets. However, they still add to your net worth, which can be very misleading. Investment Assets are much more valuable then Personal Use Assets. Investment Assets tend to appreciate over time, unlike Personal Use Assets, which tend to depreciate, or at best keep pace with inflation, after you account for the expense of ownership and maintenance.
Make sure to maintain a Cash Reserve balance of three to six months’ required living expenses.
Total housing expenses, including mortgage debt, shouldn’t exceed more than 28 percent of total income.
Total debt, including your mortgage, shouldn’t exceed more than 36 percent of total income.
Minimize your use of all debt, with the possible exceptions of home mortgage, business, investments, and school loans. Used wisely, this type of debt can leverage your ability to acquire a home, start or expand a business, or advance your education — and thereby enhance your ability to earn more money.