One of my goals as a Certified Financial Planner ™ (CFP®) Professional is to ensure my clients understand how to manage all aspects of their wealth. Knowledge is power, meaning to make informed financial decisions, you must understand all the factors that contribute to your financial stability. In this segment of Linden Oak’s Know Your Terms Series, we will focus on Net Worth.
What Is Net Worth?
Net worth is often confused with your net income or net salary but is an entirely different financial term. Briefly, your net worth is everything you own minus debt. The best way to determine your net worth is to make a list of all your assets and all your debt and the negative or positive value of each.
What Are Your Assets?
Even if your salary is low, you may be “asset rich and cash poor.” For example, you may live paycheck-to-paycheck, but if your home is paid in full, your home is a valuable asset. Other assets you must factor in include:
Art and collectibles
Stocks and bonds
401K and retirement
Even if your assets are not paid in full, you may have equity that can positively contribute to your wealth.
Striking The Right Balance
Most of us know at least one person or one family who seemed to be in solid financial standing, then one change sent them spiraling into debt. Often, this is because their debt and liabilities outweighed their net worth. Not that they weren’t earning an attractive annual salary, but they may have lost sight of or underprioritized their net worth.
Here’s a rather frightening example of net worth:
A couple retires. They have combined personal loan debt of $125,000, owe $10,000 on their cars, and they just purchased a condo, leaving them with a $225,000 mortgage. As far as assets, they have $5,000 in the bank and $20,000 in retirement and other assets.
While they have money in savings, this couple’s net worth is in the negative because they don’t yet have any equity in their home. Their debt totals $360,000 (personal loans, condo and cars) minus their assets of $25,000 (savings and retirement), leaving them with -$335,000.
Even with this simple example, it’s easy to see how net worth can affect quality of life. It is important to track your net worth in the years prior to retirement, so you are prepared with knowledge in the event of something unexpected happening: forced retirement, disability or health concerns, divorce, etc.
Prior to retirement:
Review your net worth before you retire so you can understand if your portfolio will be able to support you in retirement.
Understand from which accounts you will draw funds to supplement your income in retirement.
Understand how various assets are taxed when you begin making withdrawals.
Understand what your liabilities are relative to your assets (which will help you gauge what some of your non-discretionary expenses will be in retirement).
How A CFP® Professional Can Assist
As you can imagine, when there is significant debt and minimal breathing room in savings, losing a job, divorce, unexpected home maintenance or increased health care costs can quickly send things spiraling out of control. This is one of the many reasons it is important to calculate your net worth.
As your CFP® Professional, I will help you determine your current net worth and the immediate steps you can take to reduce your financial risks. This goes beyond budgeting to planning how and when to pay off debts or invest in new assets. Regardless of where you are, we will work together to strengthen your financial portfolio.
Linden Oak Wealth Partners offers fee-only financial advising customized for women, in particular, women in transition. Our goal is to create an environment where financial planning is efficient, simplified and easy to understand. We want clients to feel empowered and engaged every step of the way. Please contact us to schedule an initial consultation today.
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Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Linden Oak Wealth Partners unless a client service agreement is in place.
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