Where You Are Now
To make the most of your efforts to get a solid retirement strategy under way, you first need to understand your current net worth. This is simply the net figure resulting when you add up all of what you own (your assets) and subtract the total of what you owe (your liabilities). Include the following in the list of what you own:
Cash in checking and savings accounts
Market value of your home
Market value of vehicles, boats, etc.
Current value of investments such as stocks, bonds, mutual funds
Money already in IRAs, pension funds, or other retirement accounts
Personal possessions
Next, go ahead and make a list of all your liabilities. These might include the following:
Remaining mortgage on your home or other real estate
Home equity lines
Auto loans
Credit card debt
Student loans
Income taxes due
Capital gains taxes due from selling investments
All other outstanding bills
Two individuals who are the same age, are making the same income, and live in the same neighborhood can have very different net worths. To illustrate this difference, imagine neighbors named Chris and Pat. They moved into comparable houses around ten years ago when they were both twenty-seven years old. Both have moved up in their respective careers and now have comfortable incomes. Let's see what has transpired financially for each of them over that period.
House |
$300,000 |
Car |
$12,000 |
Cash/Savings |
$10,000 |
Mutual Funds |
$30,000 |
401(k)/IRAs |
$60,000 |
Beach Cottage |
$90,000 |
TOTAL |
$502,000 |
Mortgages |
$125,000 |
Credit Cards |
$1,000 |
Auto Loan |
$3,000 |
Capital Gains Taxes |
$4,000 |
TOTAL |
$133,000 |
NET WORTH |
$369,000 |
Now, let's look at how Pat did during the same ten year period.
House |
$300,000 |
Car |
$30,000 |
Cash/Savings |
$7,500 |
CDs |
$25,000 |
Pension |
$47,000 |
TOTAL |
$409,500 |
Mortgages |
$200,000 |
Credit Cards |
$31,000 |
Auto Loan |
$24,000 |
Student Loans |
$6,000 |
TOTAL |
$261,000 |
NET WORTH |
$148,500 |
Even though Pat and Chris have homes with the same market value, the difference in their outstanding mortgages reduces Pat's net worth. Other differences pop out when their auto loans and credit card debts are compared. It looks like Chris may be driving a conservative, inexpensive car while Pat seems to have borrowed to the hilt to get an expensive set of wheels. The credit card debt suggests Pat may be succumbing to impulse purchases and a lifestyle not matched to her income. It looks like Chris may have cashed out some securities to buy the vacation cottage and now has a capital gains obligation of $4,000. Yet the bottom lines reveal that overall Chris has done a better job than Pat building a greater net worth.
You want your net worth to remain positive and to grow each year. Creating a strong net worth will form the basis for your financial security in later years. It will also be a resource to help you through difficult financial times or big life changes such as marriage or the birth of a child.
These sample net worth comparisons are a snapshot at a given point in time for both Chris and Pat. You can do the same right now using statements from your financial institutions. Knowing your net worth is an important benchmark to help guide you with your financial planning decision-making.
Calculate your net worth at least annually. It will give you a picture of how you are progressing with your financial health. If you have had some backsliding in savings or some investments are underperforming, you will see how they affect the overall picture and you can make adjustments quickly.
