Financial planning is all about preparing for the future. But it begins by understanding where you are today. Why? And how can you calculate your actual financial position accurately? Here are a few answers for any beginners who want to improve their finances starting today.
Why Should You Take Stock?
When you plan to do anything, you must first know where you are currently located. If you want to hike up a mountain, you would likely orient yourself on a provided map or use your GPS. Then, you can decide the route to reach the summit based on that information.
Similarly, to reach your financial goals, you first need an accurate idea of where you stand. This will tell you how far you have to go before reaching a goal, how many goals are simultaneously possible, and how to make goals achievable in the time allotted.
How Can You Calculate Your Position?
A GPS system determines your physical location with the use of coordinates — latitude and longitude. In a similar way, a net worth statement calculates your financial situation using assets and liabilities. Here's how you make this calculation.
First, add up your assets. If you are doing a net worth statement as an individual, you would only use assets that are in your name or the portion of a shared asset that belongs to you. For most Americans, personal assets include the value of their home and vehicles, amounts in bank accounts, the value of retirement and investment accounts, and valuable items that could be sold if money were needed.
Then, you will need to put together all your liabilities. Liabilities are debts and other amounts that would need to be paid to others (such as family or friends) if you liquidate your assets. Obviously, this includes straight loans from banks and other lenders as well as credit card debt, student loans, and mortgage(s). Be sure to add up all liabilities for the most accurate picture.
To find your net worth, add up all your assets and then subtract all the liabilities from this number. Hopefully, you will end up with a positive amount — known as a positive net worth. You have a negative net worth when your liabilities cost more than the sum of your assets.
Where Should You Go Next?
Armed with this realistic snapshot of your current financial state, meet with a financial planner to go over your goals and how this affects them. You may find, for instance, that you want to sell an asset to get that net worth into a better state. And as you save or invest toward goals, your net worth will likely grow in a positive manner.
No matter how you decide to move forward, when you have facts you can more easily make smart decisions about your future. And a qualified financial planner can help. Make an appointment to learn more today.
For more information on financial planning, consult a resource in your area.