by Steve Cyr
To plan anything well, you need a clear starting point and a way to measure your progress. With personal financial planning, the best way to start may be to figure your “personal net worth.” This is simply the value of your assets (everything you own) minus your liabilities (everything you owe). The result is a scorecard of the overall state of your financial life.
Start your asset list with your major financial resources, including the current balance of your retirement plan account and the market value of your house, as well as the market value of any other investments, back account balances, and the cash value of any insurance policies. Then, estimate the value of your vehicles, appliances, and other possessions. Note that these assets depreciate in value, though.
Your mortgage balance should head your list of liabilities, followed by any amounts you owe on auto or home equity loans and credit cards, and any taxes you’ll have to pay. Your net worth is the difference between the total amount of your assets and the total amount of your liabilities.
By periodically determining your net worth, you can measure the progress you’re making toward your long-term goals, including saving enough for a comfortable retirement. You’ll track the growth of your retirement savings each time you calculate your net worth. And measuring your progress gives you an opportunity to make adjustments if you think your retirement money is growing too slowly.
Calculating your net worth also can show you how large a margin for financial error you have. When you list your assets and liabilities, divide them into two categories–current and long-term–to determine the amount of cash you could make available in a hurry if necessary. For example, a bank savings account is a current asset that easily can be converted to cash. But selling an asset such as your house usually requires a lot of time. A mortgage is a large, long-term liability, yet the short-term cash impact of each mortgage payment may be relatively low.
A net worth calculation also can help you analyze your spending and saving patterns. You create a scorecard of where your income is going and can see where to make changes. If you want to increase your net worth, be saving more for short- and long-term needs.
Steve Cyr is a financial advisor with First Command Financial Services. Steve is a graduate of the United States Military Academy at West Point with a Bachelor of Science degree with a concentration on Economics and served eight years in the U.S. Army.