What’s your Net Worth? June 16, 2008Posted by shaferfinancial in Uncategorized.
Tags: financial laboratory, financial plan, herd, mutual funds, net worth, rate of return, school of fish, working net worth
This week we will spend some time discusssing important financial equtions that all folks should know and understand. The first and single most important equation that is critical to know is “working net worth.”
This is a basic finanical number everyone should calculate every month until your net worth is ingrained in your brain. If it isn’t going up, then you have major issues in your financial life. So let’s calculate it.
First, list all your assets and their approximate values. Now break the list down into two categories. The first category is appreciating assets. Place all your assets that appreciate over time in this category. This should include your home, other real estate, stocks, bonds, mutual funds, savings accounts, etc. The second category is non-appreciating assets. Here you put your cars/trucks, furniture, TV’s, personal items, etc. Next create a list of your liabilities/debts. Your mortgage, credit card balances, car loans, etc. Now subtract your liabilities from your assets. This is your net worth. Don’t panic if this is a negative number! Now, subtract your liabilities from your appreciating assets. This is your working net worth. This is our most important metric. This is the number that we want to see grow and will determine how well your wealth plan is working.
Now here is where some interesting things happen. First off, you can have growing amount of debt and still have a growing working net worth. In fact, done with a porposeful plan, you might end up with much debt at retirement, yet be in great financial condition. Now I know this is contrary to what many folks out there are hearing. The “no debt” crowd is really yelling their nonsense these days. The bottom line is that as long as your working net worth is rising you are reaching your goals. We will talk about debt service later this week after we have discussed cash flow.
Now, my requirement is that my working net worth should appreciate 15% per year in order to reach my goals. Once you are fully conversant with this number, you can calculate what your rate of return must be to reach your goal. Fortunately, I have been beating my goal over the last ten years (since I have started this habit). There are some years that I haven’t while other years I have, but the bottom line looking at the long term I have exceeded my goal.
There are two basic ways to increase your working net worth. The first is to add to your investments. Of course, everyone should do this annually, but the question is always which investments. For this I have a plan. At the Shafer Wealth Academy (www.shaferwealthacademy.com) we spend much time in both figuring out our net worth and developing a plan to increase it. The second way is the rate of return you are getting on your investments. This becomes more critical as your working net worth increases, since your total assets will start to dwarf your annual investment additions. Basically, it is my belief that folks must get a rate of return from their investments above 12% in order to achieve meaningful wealth. There are many strategies that have proven effective at getting that return. And, by now my readers know, that investing in mutual funds will not give you a return any where near that mark.
So go ahead, figure out your working net worth now. And if you want a proven technique in building that number up, contact me at email@example.com or continue with the herd, your choice!