Money (MP) If you are truly focused on improving your wealth, a great starting point is a good financial plan that helps you figure out your net worth. Today I’ll show you how using a balance sheet can help compare your financial assets (that which you own) with your financial liabilities (that which you owe) and how the difference between the two produces your personal assets on paper.
Still, others will argue, your assets is found in your network. Much sought-after speaker, entrepreneur, and marketing executive Porter Gale wrote: “Your Network is Your Net Worth” to critical acclaim. In it, he describes “How to Win Friends and Influence People” which lends somewhat credence to “It’s not what you know – It’s who you Know.” However, for our purposes here we will be talking about the assets you own.
What is net worth?
Net worth is really simple: you just add up the value of all the things that you own – the value of your home, the value of your cars, the value of your savings accounts and investment accounts and retirement accounts – and subtract from that the value of all of your debts. In a nutshell, your net worth is the single amount remaining after you’ve sold your entire assets and paid off all debts.
Your Balance Sheet
You’ll need your latest bank statements, as well as the principal balance of any loans you have. After you have all of that information available, start developing your balance sheet by listing your entire assets (tangible and intangible assets) with the values.
- Cash (in the bank, money market accounts, or CDs)
- All investments (mutual funds, college savings accounts, individual securities)
- Home value (the resale value of your residence)
- Automobile value (the resale value of your vehicle)
- Personal Property Value (resale value of jewelry, home items, etc)
- Other assets
In a nutshell your net worth is the single amount remaining after you’ve sold your entire assets and paid off all debts. The sum of these types of items is the total value of your assets. Your goal should always be to continually boost your assets.
The next items you need to look at are your liabilities. These are everything you owe out. Below are a few common liability examples:
- Remaining mortgage balance
- Home improvement loans
- Car loans
- Student loans
- Any other personal loans
- Credit card balances
Add up all the money you owe here is the sum of your liabilities. Start paying down your debt and your total liabilities will decrease.
Remember, the difference between your assets and your liabilities will be your net worth.
Select a record keeping system
One option you can use is an electronic spreadsheet to keep records, which is convenient and may be easily changed. Electronic records can also be printed, downloaded into the Cloud, or stored on a thumb drive. I’ve found an easy Net Worth Worksheet that should help you get started.
What’s your personal net worth – really worth?
To actually answer this question: After computing your assets and liabilities, try to figure out the after-tax value of each of your assets. Let’s look at a 2014 scenario of one of my Clients:
Richard had $500,000 invested in bank CDs. He also had stock worth $500,000, which if sold would result in a capital gain (the sale price minus the cost basis) of $200,000. In addition, he had and individual retirement account or 401(k) worth $500,000, funded with deductible contributions or pretax dollars.
Although each asset has a face value of $500,000, each would be worth different amounts after taxes.
The $500,000 in bank CDs would be worth $500,000 after taxes, and a little more after Richard adds the interest they earned. The stock worth $500,000, after it kicked in a capital gain of $200,000 following a sale, was worth $470,000 (because the $200,000 capital gain was taxed at a 15 percent rate). And the IRA or 401(k), taxed at a rate of 25 percent, was worth $375,000 after taxes; because the $500,000 was withdrawn from both accounts simultaneously. Hence, you see if you try to determine your real net worth without the tax consideration, you’re really inflating the financial bubble and we know what goes wrong with bubbles – they pop.
Your personal net worth solution
Part of your investment portfolio should be set up in a tax fund (mutual funds or private stocks, etc) allocated just to pay taxes. Figure out how much taxes you’ll owe on your investments and set aside monies in this tax fund. This way if you discover that you’ll owe $125,000 per year in taxes your tax fund can handle it without sweating and you’ll enjoy the monies set aside for retirement. “Yeah, but I’ll have to pay taxes even on this tax fund.” Stop crying. Allocated monies for this too! My main point: If you’ll need $1 million per year for retirement you’d better set aside at least a $150,000 (or 15%) in a tax fund to handle it. Or else $850K will have to do.