What’s Your Financial Starting Point?
KEY TAKEAWAY: Your Net Worth—your Assets minus your Liabilities—is a snapshot of your financial situation at a given point in time, and it is the financial starting point for achieving many of your life goals. By understanding your Net Worth and monitoring it over time, you can better identify financial opportunities and challenges and create an effective plan to achieve your financial goals. Scroll down to the TAKE ACTION section for this week’s actionable steps.
To achieve any change you want in yourself or your life, you need to know your starting point.
After all, if you don’t know where you’re starting from, how will you navigate to where you want to go? How will you create the roadmap—the action plan—that will take you from your Point A to your Point B?
If you’ve been along for this journey from the beginning, then you have identified your starting point when it comes to your life overall—where you are today and how you feel in different areas of your life—as well as where you want to go and how you would like to feel.
So, let me ask you this:
Do you know your starting point when it comes to your money?
GOALS & MONEY
If you have goals you’d like to achieve—something you want to do, change, feel more or less of, or have more or less of than you do now—chances are some, if not many, involve money. After all, money touches almost every facet of our lives directly or indirectly.
Think about it: What are your life goals? What do you want to achieve, feel, or have more or less of in your life?
Now, ask yourself: What role does money play? No role, a significant role, a minor role, or something in between?
Maybe your goal is to feel more fulfilled in your life. Does your financial situation impact that? Would money help you do what would make you feel more fulfilled, such as pursuing a new career direction, starting a business, or having the financial freedom to choose where you live or if and when you work?
Maybe your goal is to feel healthier, fitter, and more energized. How would money support that? It might allow you to access certain health-promoting solutions, join a gym, or hire a trainer or nutritional coach.
Maybe your goal is to settle down in a certain area you love, buy a home, and send your kids to schools you feel good about. How does money support that?
Maybe your goal is to feel more at peace and less stressed. Money may help you feel less stressed financially by helping you pay down debt, avoid living paycheck to paycheck, have a financial buffer for just-in-case events so you sleep better at night, or spend a month in an ashram.
For many goals, money will be involved in some way. So, while money is not a magic wand to achieve our goals—it’s not a panacea for health, inner peace, or fulfillment—it is a powerful tool that supports them.
If money is a factor in any of your goals, you need to know not only how much money you need to achieve them—your Point B—but also your financial starting point—your Point A—so you can create a roadmap to get you from one to the other.
So, do you know your financial starting point?
In other words, do you know your Net Worth?
YOUR NET WORTH
Your Net Worth is a snapshot of your financial position at a specific point in time.
Net Worth is calculated by taking the difference between your assets and your liabilities:
Net Worth = Assets – Liabilities
Your assets are anything you own valued based on account balance or current market value—how much you would get for them if you sold them today. Examples of assets include your house, car, bank account, retirement account, jewelry, or collectibles.
Your liabilities are anything you owe, valued as the balance you have left to pay towards any loan or other debt obligation. Examples of liabilities include any balances you owe on your home mortgage balance, car loan, student loan, or credit card.
The difference between your assets’ total value and liabilities is your Net Worth.
WHAT NET WORTH TELLS YOU
Knowing your Net Worth—your financial starting point—not only provides a snapshot of your financial situation at a given time, but it also gives you powerful insights into the picture itself.
You know the total value of your assets at a specific point in time and the types of assets you have. This is powerful information because different kinds of assets serve different purposes.
Some assets serve a practical purpose, like the car you use daily.
Some assets are for personal enjoyment, like jewelry or a boat you use on the weekend.
Some assets, like antique collectibles, are likely to appreciate or increase in value over time, while others, such as many non-collectible automobiles, will depreciate or go down in value.
Some assets, like investments in stock or bonds, are there to build wealth or generate future income.
Some assets serve a mix of purposes. Consider your home. It serves a practical purpose by providing shelter but is also an investment that may grow over time. It may even be a source of income, for example, if you rent out a room, but it can also take money to maintain.
The same goes for liabilities. Knowing your Net Worth shows you the total value of your liabilities at a specific time and the types of those liabilities. Like assets, not all liabilities are created equal.
High-interest consumer debt, such as credit card balances, can be financially corrosive due to their typically high interest rates.
A school loan can be seen as an investment in your future earning potential.
A home mortgage allows you to own an asset that might appreciate over time.
Ultimately, however, debt is an obligation that must be paid, and its cost can impact one’s ability to save for other goals.
Therefore, by knowing your Net Worth and the value and types of assets and liabilities, you know your starting point. You can better see where you have financial opportunities—such as extra savings you can invest in your retirement account, for example —or challenges—for example, the highest cost credit card debt that you want to pay off.
Knowing your Net Worth helps you create a roadmap of steps that will move you from your financial Point A to Point B. By monitoring your Net Worth over time, you can see the impact of your actions and the progress you are making toward your goals.
STEPS TO CALCULATE YOUR NET WORTH
Step 1: Choose your Net Worth tracking tool.
You can use a pencil and paper, an Excel spreadsheet, or an online tool or app to calculate your net worth. One of my favorite free resources is the Empower Personal Dashboard. Whatever tool you choose, avoid one that will overwhelm you so you will use it, and make sure you can track your history to monitor your net worth progress over time.
I use a combination of the Empower Personal Dashboard and Excel spreadsheet to track our Net Worth over time. I share my Net Worth worksheet in this week’s paid content. For access, subscribe here.
Step 2: Gather information on your assets and calculate their value.
Gather information on what you own, such as bank statements, brokerage account statements, retirement account/employee savings plan statements (e.g., 401(k), SEP), stock awards, and market values on vehicles, real estate (e.g., homes, rental properties) and collectibles (e.g., antique cars, art).
Next, note down the value of your assets at their current balance or market value (what you would get if you sold the asset today). Do not deduct from the current market value any loan balances. Loan balances go under liabilities. For example, if you have a mortgage, you’d put the current market value of your home under assets and the balance of what you still owe on your mortgage under liabilities.
What About Pensions & Annuities? Pensions and annuities are a source of income. Although these provide a financial benefit and can be included in the net worth calculation, I generally do not include these in our family’s net worth but, instead, consider them when I assess our various sources of retirement income and what we need to save to fund any gap in retirement living needs.
If you want to include pensions and annuities in your net worth calculation, you can be conservative and use the amount you would be able to cash out now, for example, the lump-sum value for a pension and the surrender value for an annuity. Alternatively, you can find the present value of the future pension or annuity payouts you expect to receive using a calculator or by asking your benefits/annuity company for assistance.
What About Permanent (Cash Value) Life Insurance? Permanent life insurance provides a financial benefit in the case of one’s death and offers an opportunity to build a cash value over time (unlike term insurance, which has no cash value). I view insurance as part of our risk management strategy; therefore, while a cash value is available if we want or need to use it, I don’t include it in our net worth calculation. If you choose to include this in yours, use the current cash value.
What About Personal Assets? Personal assets typically provide some practical use (e.g., a car for transportation) or are for personal enjoyment (e.g., art, jewelry). Unless I no longer want or need them or intend to use them to fund a financial goal—such as selling a vehicle I no longer need and using the money to increase my retirement savings— I don’t include them in our net worth calculation. However, others do include certain personal assets in their net worth. If you include personal assets in yours, use the current market value.
Step 3: Gather information on your liabilities and calculate their amount.
Gather information on what you owe, such as loan statements (mortgage, home equity loan, auto loan, student loan) and credit card statements.
Next, note down the total amount of your liabilities. Include only the outstanding balance you owe, not the original loan amount.
For example, if your original home loan was $200,000, but you owe a balance of $150,000, then list $150,000 under liabilities. If you have multiple obligations in a single category (like several credit cards or student loans), list each separately. For each debt, note its interest rate, monthly payment amount, and, if applicable, length and expected payoff date.
This is powerful information to know. There is space for this in the Net Worth worksheet that I share in this week’s paid content. For access, subscribe here.
Step 4: Calculate your net worth.
Finally, calculate your net worth by taking Total Assets MINUS Total Liabilities.
For example, if your assets are $300,000 and your liabilities $200,000, then your net worth is $300,000 – $200,000 = $100,000, and if your assets are $200,000 and your liabilities $300,000, then your net worth is $200,000 – $300,000 = -$100,000.
If Assets > Liabilities, then you have a positive net worth. For example, if you have $300,000 in assets and $200,000 in liabilities, then your net worth is $100,000 ($300,000 – $200,000 = $100,000).
If Assets < Liabilities, then you have a negative net worth. For example, if you have $200,000 in assets and $300,000 in liabilities, then your net worth is -$100,000 ($200,000 – $300,000 = -$100,000).
If Assets = Liabilities, then your net worth is zero (the value of what you own is the same as what you owe). For example, if you have $300,000 in assets and $300,000 in liabilities, then your net worth is $0 ($300,000 – $300,000 = $0).
WHAT IS YOUR NET WORTH SAYING?
Review your net worth. What is it telling you? Consider the following:
- Is your net worth positive or negative?
- How is your asset profile? Which of your assets will fund your goals, and how well? For example, do you have assets that generate an income, will grow in value, or are a combination of both? Do you have more assets that you use for personal use, will need to be replaced, or have high associated costs?
- How is your liability profile? What type of liabilities do you have, what is their cost, and how long will that cost be with you? Do you plan to pay them off, and if so, how and when?
- After monitoring your Net Worth over time, how is it changing? Is it at the desired level or moving in the right direction to support your goals? What is driving the change, and which factors can you control (e.g., income, spending), and which can’t you control (e.g., stock market fluctuations)?
FINAL THOUGHTS
Knowledge is power. The more informed you are, the more informed decisions and actions you can take.
That goes for your finances, too. Although it can be very tempting to bury our heads in the sand and hope that we don’t and won’t need to deal with them, that strategy generally doesn’t work. We can’t ignore money or the role it plays because it’s so embedded in all areas of our lives.
“Ignorance is bliss” also doesn’t work if you don’t want to stay where you are financially. If you have financial goals you want to achieve—if the financial status quo is not what you desire—then staying ignorant won’t help you achieve them.
So, figure out your financial starting point so you can create an action plan that will.
TAKE ACTION:
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Choose a Net Worth tracking tool. I use a combination of the free Empower Personal Dashboard tool and Excel spreadsheet to track our Net Worth over time. I share my Net Worth worksheet in this week’s paid content. For access, subscribe here.
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Gather information on your assets and note their value based on their current balance or market value (what you would get if you sold the asset today).
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Gather information on your liabilities and note down the total amounts still owed, as well as the interest rate, monthly payment amount, and, if applicable, length and expected payoff date.
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Analyze your net worth to understand your financial strengths and areas of opportunities, and monitor it over time to check your progress.
IMPORTANT: The information provided is for educational and informational purposes only. It is not intended to be a substitute for professional advice, diagnosis, or treatment. Always seek the advice of a qualified professional with any questions you may have regarding the topics discussed here as the topics discussed are based on general principles and may not be applicable to every individual.
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