To be on top of your financial plan, the
first step is to really understand your net worth as not being abreast
of this means you must have ended 2013 without being in the position to
say, “this is where I am.” For the New Year, starting in about 72 hours,
begin with understanding your net worth and going forward, you will be
able to upgrade for a better financial positioning.
For you therefore to be able to plan
successfully for the future, you need to know where you stand now.
Your
net worth is one of the most accurate measures of your financial health
and progress as it presents you with a snapshot of your financial
condition at a point in time, says financial adviser, Nimi Akinkugbe.
Potential lenders will ask for a net
worth statement when you apply for a loan such as a car loan, credit
card or a mortgage. If you have fairly up-to-date documentation on hand,
it will be that much easier completing the loan application. As it
reflects what you actually own, they can look closely at your current
assets and liabilities, and they like to see that you have an investment
portfolio.
Calculating your net worth: Total Assets – Total Liabilities = Net worth
Calculating your net worth is a fairly
straightforward process. It lists your assets (all that you own and
value) and subtracts your liabilities (all that you owe). Before you
embark on this exercise, get yourself organised and gather all your
financial documentation; your bank statements, investment advices,
receipts and so on. Here are some simple steps to help you to calculate
your net worth.
List your major assets. What is the
value of your car, your home and any other property you might own? Be
conservative in your estimates so that you do not distort the true
picture of your net worth. Particularly during a recession or periods of
economic difficulty, real estate is not easily marketable so be
realistic in your estimates. Your home is likely to be your largest
single asset and your mortgage, your biggest liability. You can get a
fairly accurate idea of what it’s really “worth” by finding out what
homes are selling for in your area.
List other assets such as cash, bank
accounts, certificates of deposit, stocks, bonds, mutual funds,
retirement savings and life insurance policies that have accumulated
cash value.
Do you have any valuable personal
effects such as jewelry, an expensive wristwatch, a significant musical
instrument, some special furniture or valuable artwork, or collections?
Don’t list everything, just things of significant value. Again, be sure
to list the market value of such assets, as their real value is only
what the market is prepared to pay for them and not what you would like
the value to be.
Add up all the assets that you have
listed to get your total asset figure. Determining the value of your
valuables is not only necessary to figure your net worth; this
information will also be very useful in ensuring that you are better
able to protect your assets by having adequate insurance coverage.
Now list and add up your liabilities or
what you owe such as your mortgage balance, car loans, outstanding
balances on your credit cards and any other personal debt obligations.
Finally, simply subtract the sum of your liabilities from the sum of your assets and the result is your net worth.
The ultimate objective of this financial
exercise should be to increase your net worth. Ideally, your net worth
should be positive and steadily increasing over time. It has little to
do with how much you earn; as the old saying goes, “it’s not what you
make, it’s what you keep.” If you have a positive net worth, you can
start working on building on this momentum.
If your net worth is negative, with your
liabilities greater than your assets, don’t be discouraged. That is the
purpose of this exercise. This should jolt you into making necessary
changes in your financial situation. No matter where you find yourself
today, now that you know exactly where you stand, you can begin to set
personal financial objectives and take deliberate steps to work towards
achieving them.
There are personal finance software
packages such as Quicken that will easily compute your net worth for you
once you have inputed all the necessary information. These programmes
are designed specifically for tracking investments and other assets as
well as any debts and can support you in your personal financial
management.
How to grow your net worth
If your debt is under control, you can
afford to start building a surplus that can be invested in assets that
are likely to appreciate more than the inflation rate over time, such as
property, shares, mutual funds and other investments. Take advantage of
any windfall income such as bonuses; funnel such unexpected proceeds
into productive assets or into reducing or paying off your debt
particularly the high interest debt. It pays to keep your liabilities
manageable.
Track your progress
For many people, computing their net
worth is purely an academic exercise with very little impact on the way
they handle their finances. For others, it can be a powerful motivator.
The raw net worth number itself isn’t really all that meaningful; what
is much more useful, is how it changes over time.
Try to go through this process at least
once a year and track your progress by comparing your net worth to
earlier net worth calculations. As the year 2013 draws to a close, it is
a good time to go through this exercise so that you can begin the New
Year with a firm plan to secure your financial future.
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