In order to plan for your future, it is important to know exactly where you are in life today! Your finances are no different. Have you ever taken the time to determine exactly how much you are financially worth? Are you heavily invested into real estate but have little in the bank account, or do you have healthy bank balances but a hefty credit card balance? Understanding where and how you allocate your wealth are key ingredients in identifying and implementing financial goals. It not simply about choosing one asset class over the other; the goal for most of us should be to build a net worth that is well diversified and encompasses all asset classes. Generating a net worth statement is a great tool to monitor and report on your progress.
So where do you start?
Firstly, you do not need a fancy program, a simple excel spreadsheet will work just fine. The best way to start is create 2 columns and labelled as Assets and the other labelled Liabilities.
Once you have listed all your assets and listed all your liabilities, total each column on your spreadsheet; this will give you a complete picture of what you OWN versus what you OWE. The next step is the most important. Deduct your liabilities from your assets and this will provide you with your actual net worth. It is important to update your net worth at least once per year; however, in our family we choose to update every January and July. This allows us to keep better track of our financial goals and provides us a quick time frame should we start deviating from our original plan.
When you update your net worth statement you will discover three very important facts.
1. Where your assets are held?
2. How much your assets are currently worth?
3. How much liability is associated with the asset?
There is no right or wrong answer on how your net worth should be allocated, but there are two elements that should be incorporated.
1. Make sure your assets are well diversified.
2. Payoff your debt.
Remember at the end of the day we can’t control the financial markets or their performance nor can we predict the value of our home, but what we can manage effectively is how well diversified our net worth can be in order to achieve our financial goals.
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