When it comes to finance, most business owners and other individuals strive to increase their wealth to have more opportunities. Ostensibly, for travel, hobbies or retirement.
The trouble with some, however, is that they focus on income and not their net worth. That means, of course, spending less than they earn.
Because people have a tendency to spend all their salaries, they stay stagnant financially.
Benefits of a high net worth
Some examples of why net worth is more important than a higher income:
— You aren’t taxed on net worth, but you are on annual income.
— You develop a positive big-picture outlook. You’re more likely to focus on building assets instead of just your day-to-day job.
— You’re more financially secure. This means your self worth improves because you’ll feel better.
— You tend to benefit from relationships with other high net-worth individuals.
So, it’s best to determine your net worth – a gauge of your financial standing so you know where you are to strategize for your goals.
Your net worth is a total of all your assets minus your liabilities.
For example and not to simplify, you total your assets – from the value of your house to your cash in the bank – then, you must subtract your debts – your mortgage, other loans and credit card balances.
How to determine your net worth:
Assets
- Make sure you keep a secure file containing your financial assets and liabilities. Add to it as situations arise. Formally update it annually.
- This will insure your financial advisor or spouse can easily access the information.
- Be conservative in listing your biggest assets. Don’t over-estimate.
- Typically, this means the values of your home and cars. If you own a business, estimate its value (even though it’s more complex).
- Look at your latest statements of your assets such as checking accounts, savings accounts, CDs, brokerage and retirement accounts.
- List your valuable personal items, worth $500 or more, such as jewelry, musical instruments or coin collections.
- Total all the dollar amounts, which are your total assets.
“Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones.”
-Benjamin Franklin
Liabilities
- List your large liabilities such as the balances of your home mortgage and car loans.
- List your personal liabilities from debts such as credit cards or student loans.
- Total all the balances. This is your total liabilities.
Calculating your net worth
- To determine your net worth, subtract all the liabilities from the total assets.
- Don’t panic if it’s a low or negative number. It’s just a starting point so you can start strategizing to improve your net worth.
- Calculate your net worth each year. This will help you assess your progress in achieving your goals.
From the Coach’s Corner, here are related tips on finance:
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Finance Checklist for Strategic Planning, Growth — Strategic planning in finance for growth means avoiding trendy fads. Instead, it requires an ongoing down-to-earth approach in order to create value. Here are seven steps.
“Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones.”
-Benjamin Franklin
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