Net Worth Your Financial Health
Most people go once a year to their doctor and have a physical to see how their health is. To catch anything that might be wrong with us. We also get our cars serviced every 3000 miles or every 3 months so that it is in proper running condition. So we check our cars and our health to see where we are with those things. How many of you know your financial health? I bet less than 25% of people can say with absolute conviction that they know their net worth. What is wrong with this picture? We know the status of some really important things, but what we don’t know is how we use money! We don’t know where our money is going. Everyone needs to get a monetary check up and so you can get on pace to know where you are financially. This is important for anyone that wants to be financially independent.
Where do we start? It has to be with a Balance Sheet. Businesses use this document to determine where they are financially at the end of each year. For all intents and purposes your family is a business. You are trying to keep more money than you spend. So approach it that way. A balance sheet consists of 2 things, assets and liabilities and the difference between the two is your current Net worth.
What is an asset? Simply stated it is anything that appreciates in value and there are two types, long term and short term. Short term assets are things like savings accounts, checking accounts, cash, these are all things that you can use and turn into cash very rapidly. Basically you have easy access to it. Long term assets include things like a houses, stocks and bonds, rental property etc…
Liabilities are those things which decrease your wealth or take away from it. There are long term and short term liabilities; credit cards, installment loans ( car loans, college loans) and personal loans. Longer Term liabilities are your home or investment property and any other obligations that might being a lender.
Determining your net worth is taking the total assets and subtracting it from the total liabilities and you will get your net worth. Here is a very basic example of a personal balance sheet for a more complete version click here.
Assets
Short Term
Cash on Hand $______
Checking Account $______
Savings $______
Money Market Account $______
Emergency Fund $______
Certificate of Deposit $______
Cash Value Life Insurance $______
Long-Term
Personal Real Estate $______
Marketable Securities (Stocks, Bonds, Annuities) $______
Investment Real Estate $______
Tax Incentive Investments (IRA’s, 401k, pensions) $______
Personal Assets
All things you own in your home. $______
Total Assets $______
Liabilities
Short Term
Credit Cards (Total up all Balances for all cards) $______
Installment Loans $______
Personal Loans $______
Long Term
Personal Real Estate $______
Investment Real Estate $______
Other Liabilities $______
Total Liabilities $______
The key with this statement is to pull it out every 3 months to update it to see your progress. What you should see is your wealth growing. The net worth statement is the essential starting point in determining your financial goals it helps determine what you have and what you need to do to get where you want to be.
Remember financial independence is a function of how much effort you put into the details, and by using statements like a net worth statement it will help you to look at the details.