Calculating your net worth can be a shocking dose of reality or a pleasant surprise. However, from a financial planning perspective, it gives us an excellent starting point in analyzing your financial profile. Understanding and knowing your net worth will allow you to set goals and find ways to improve your finances from a holistic perspective.
As advisors, we analyze net worth annually to determine if progress was made in growth and, if not, what factors contributed to stagnation or a decline year over year. The process of calculating your household’s net worth yields a personal balance sheet in the same manner and discipline a company develops a balance sheet.
The basic equation for calculating net worth is subtracting liabilities from assets.
In summary net worth is calculated as Net Worth = Assets – Liabilities.
In preparing a financial plan, there are often instances when a prospective client has a negative net worth. When this is the case we implement several scenarios in how to best reduce liabilities and grow your net worth. We have often found that paying off consumer debt (credit cards, store card, auto loans) quickly is the first step in growing net worth because consumer debt has no tax benefit and often carries a higher interest rate. After liabilities are systematically reduced, it is then that your net worth can hopefully grow strategically. One quick way to do this is to automatically transfer money to investment accounts each month as it puts savings on “auto pilot” and allows you to dollar cost average into the market. Over time, this savings strategy can have a profound impact (create hyperlink to historical growth of dollar cost averaging into market). It is through calculating your net worth and creating your household’s balance sheet that we see what areas can be improved.
It is our job at Geier Asset Management, Inc. to help develop a plan to successfully grow your net worth and help guide you in your financial goals. Contact us today to speak with a financial advisor about your net worth.