To succeed in anything, you need a baseline and a way to measure your progress. With personal financial planning, the best place to start may be to determine your “personal net worth.” This will help you get a big-picture view of the overall state of your financial life.
Start your asset list with your major financial resources — the current balance of your 401K or Thrift Savings Plan (TSP) account, and the market value of your house. Next, list the market value of any other investments, bank account balances, and the cash value of any insurance policies. Then, estimate the value of your vehicles, appliances, and other possessions.
Your mortgage balance should lead your list of liabilities, followed by any funds you owe on auto or home equity loans and credit cards, and any taxes you’ll have to pay. Your net worth is the difference between the total amount of your assets and the total amount of your liabilities.
1.) Check Your Progress
By periodically determining your net worth, you can measure the progress you make toward your long-term goals, including saving enough for a comfortable retirement. You’ll track the growth of your retirement savings each time you calculate your net worth. And measuring your progress gives you an opportunity to make adjustments if you think your retirement money is growing too slowly.
2.) Measure Your Reserves
Calculating your net worth can also show you how large a margin for financial error you have. When you list your assets and liabilities, divide them into two categories: current and long term. Then, determine the amount of cash you could make available in a hurry if necessary. For example, a bank savings account is a current asset that can be easily converted to cash. But selling an asset such as your house usually requires a lot of time. A mortgage is a large, long-term liability, yet the short-term cash impact of each mortgage payment may be relatively low.
3.) Examine Your Spending and Saving Patterns
A net worth calculation can also help to measure your progress. How do you feel you are doing? Is your net worth better (or worse); than last year? This also creates an opportunity to analyze your spending and saving patterns. Where is your income going? What do you need to change in order to make better progress next year? Saving more money for your short- and long-term needs can help increase your net worth over time.
This article was reprinted in part from a First Command Financial Services publication.