In my last post, I talked about the net worth statement. Also called a balance sheet, it is a tool you can use to see if you are making progress towards your goals and objectives. You can read the last post by clicking here.
In this post, I wanted to discuss some of the issues or opportunities concerning your net worth statement. The net worth statement keeps you informed about your overall financial standing. It lets you know if your net worth is decreasing or increasing.
Valuing Assets and Labilities
First, a key to the net worth or balance sheet is determining good values for assets and liabilities. And because you are using this net worth to compare to other years, you need the values to be as accurate as possible. Therefore, you will want to use the same valuing tool. For example, if you are valuing a car, and you use Kelley Blue Book.com one year, you may want to use Kelley Blue Book to value the car next year. Otherwise, if we don’t get good values for assets and liabilities, what’s the use to comparing it to prior and future years.
Addressing Net Worth Concerns
After analyzing your net worth statement, you may have some concerns. These concerns may include low assets, high liabilities, or negative net worth. You will want to address these opportunities. The net worth statement may also provide information that will lead to the development or revision of goals and objectives. For example, you may create an objective to change a negative net worth to positive net worth.
Increasing Net Worth by Cutting Spending
As a financial counselor, I would help clients increase their net worth by showing them ways to increase their assets, decrease their liabilities, or both. One way to increase assets is to cut back on spending. This will allow for the building up of savings which will increase net worth. Investing is another opportunity for some to increase assets.
As you are addressing opportunities, keep in mind that that decreasing spending will have the greatest impact on net worth. The reduction should focus on larger asset items such as housing and transportation. Reducing spending on smaller daily expenditures will not have the same impact.
The Effect of Increasing Income
Another way to increase net worth is to increase income. If you can negotiate a pay raise, find part-time work, or sell your products or services, you can use the increase to build savings and pay down debts.
Paying Off Debt and New Worth
Finally, paying off debt can quickly increase net worth. Paying off high-interest credit card debt can have the most immediate impact on net worth. Freeing up cash by reducing spending or increasing income can be a great start toward a debt repayment plan.
All Net Worth is Not the Same
A person who does not currently have the financial resources to pay off all existing debt is considered insolvent. Their liabilities are more than their assets. This situation is frequently found among students and recent college graduates who have incurred student loans and have not yet built-up assets to offset debts. Considering where an individual or family is in their financial life cycle, insolvency or a negative net could be expected. A negative net worth due to student loans or the purchase of a home is not the same as a negative net worth due to credit card bills or the accumulation of lifestyle assets or assets that don’t produce disposable income.
As we start a new year, you may want to create a net worth statement to see where you stand financially. Once you have an idea of your net worth, you can develop objectives and goals to improve your financial situation. However, you can always commit to spending less than you make and increase your rate of saving in this new year. This will always move your finances forward in the new year.