Saturday, August 17, 2013
Its (a thousand or) a million dollar question?
This a way off topic but I was asked exactly this a few days ago. Its a million dollar question..okay, a few thousand dollars question? Do YOU really know your NET WORTH? Are you the picture of financial health? Do you REALLY KNOW?
You won't know the answer to that question until you take your 'Financial Snapshot' - of your financial situation, that is. In the financial world, that "financial snapshot" is known as your net worth. It's arrived at by adding the value of everything you own, then subtracting what you owe (or in accounting terms, assets minus liabilities). When you look at the bottom line, you'll quickly see whether you're financially sound. If your net worth is a big, fat positive number, chances are you're in good shape. But if the figure you come up with is barely on the positive side of the ledger - or worse, has a minus sign in front of it - you've got some work ahead of you.
Its easy! To put together your personal financial snapshot, use a sheet of paper or appropriate computer software and follow these steps:
First, find your most recent statements for mortgages, credit cards, bank loans, investments and any other assets or liabilities. In one column, list the current market values of all the big ticket liquid items you own - including your house, car, vacation property, furniture, art and collectibles, fine jewelry, and other valuables. Be careful not to overestimate their value. It might make you feel better, but will lead to a less-than-accurate assessment of your finances. Don't bother with small items, since they are usually difficult to convert to cash and are often of little value.
In the same column, list the cash values of your investments - include bank accounts, stocks, bonds, mutual funds, guaranteed investment certificates, employee shareholder plans, deferred profit sharing plans, real estate investments (apart from your home) and other holdings. Don't forget to include investments held inside your registered retirement savings plan.
In another column, list all your liabilities - include debts such as mortgages, car and other personal loans, lines of credit, credit card balances, income taxes owing (including future taxes such as those on RRSPs upon death) and other outstanding bills. Add up both columns individually to come up with your total assets and total liabilities. Finally, subtract your liabilities from your assets. The result is your net worth.
You and your spouse (if you one) can calculate your individual net worth separately, but it is better to view your assets and liabilities together, since this will provide a more accurate picture of your family finances. You may be surprised to discover that you're worth more than you thought. On the other hand, some people will find just the opposite - that if they converted their assets to cash and paid off all debts there would be little or nothing left over. But that's not necessarily a reason to despair. For example, if you're young your net worth may be lower because you've had less time to accumulate assets. You may even have a large mortgage. As you move on in life, however, your wealth should grow.
There is no hard and fast rule as to what constitutes "acceptable" net worth. The best way to determine whether you're on track is to consult with your financial advisor. He or she can make a quick assessment, and show you how to fine tune your finances if necessary. Now, thank the Websnacker for this handy guide!!