How well you progress financially? Your personal net worth statement will tell you.
Net Worth is a Measure of Financial Health
By creating a personal net worth statement you will give yourself a quick snapshot into your financial life, be able to understand what would happen in the worst case scenario, and understand how your actions affect your finances.
If you are like most people who are actively pursuing financial independence, you will need to grow your net worth carefully and diligently. Your main financial goal should be to increase your net worth over your life.
If you must sell all your assets today to pay off the total amount of debts you owe, how much will you have left for yourself? It’s worth taking some time to do the calculations and find out.
Net Worth = Assets – Liabilities
The first step of financial planning is to find out how much do you have with the following:
1. List down all your assets with its current value
2. List down all your liabilities with its current value
3. Calculate your net worth using the formula shown above
Once you have done the calculations, you will have your very own personal balance sheet that shows you what your net worth is. This is the wealth that really belongs to you. Based on the calculations:
- Is the number positive or negative?
- Are you on track with your financial goals?
What gets measured gets done. So, on the net worth statement, you can see the gap between your financial goals and make plans to fill them up.
Net Worth Grows Better without Bad Debts
We acquire assets with money that we make via our profession and work. We acquire liabilities when we have to resort to borrowing, because don’t have enough money to buy the items or asset we need.
Some liabilities are unavoidable, such as a housing loan, hire-purchase loan for a car, etc. However, there are plenty of liabilities which are totally avoidable, such as credit card debt, or a personal loans to pay for something you can live without, such as a luxurious holiday or a grand wedding party.
Avoid bad debts as much as possible, as it lowers and suppresses your net worth. These debts stand in the way between you and financial independence. Take action to eliminate bad debts, or else you will have to delay the time for achieving your goals towards financial freedom.
Cash Flow Matters
Cash flow management is about how you spend and save your money. In order to create wealth, you need to have extra cash to invest in assets. When you start from scratch, your job income will likely be the primary source of cash. Before you begin investing what your earnings, you need to get a grip on managing your cash flow.
In order to have assets in our net worth statement, we first need to have money after paying off our expenses to buy or acquire the asset.
Cash Flow Surplus = Income – Expenses (You get a positive number)
Your goal should be to ensure you have some leftover money at the end of each month so that you have the ‘capital’ to acquire assets.
Cash Flow Deficit = Income – Expenses (You get a negative number)
If you get a negative number, this means that you spend more than you earn. In this case, you will not have any additional money to help you build your assets, unless you start living within your means.
Your goal is to expand the portion that goes to savings and investments as much as possible, and as fast as possible. To have a positive net worth, you must first have good cash flow management. Without proper grasp of your finances, your net worth can’t go anywhere further up.
How much net worth is enough for you?
Key to achieving true wealth is proper money management and financial planning. Start calculating and find out where you truly stand with your financial goals.
Get on the path to financial freedom with a licensed financial planner who is professionally trained to understand the time value of money. Look for the one who can provide guidance to discover what’s important to you, help you determine the optimal ‘enough’ point, discover potential weaknesses and blind spots, and eventually help you put in place a comprehensive plan that can be the spring-board towards achieving your life goals.