How does your net worth relate to planning your finances?
Understanding your financial position is essential to properly planning your life. Without understanding completely what kind of shape you are in financially, it is not possible to set realistic goals. Evaluating your financial position can be complex if you own various asset classes such as real estate, foreign securities or multiple businesses. In this article, I will lay out the basics of personal net worth evaluation. In later blogs I will dive deeper into more complex analysis such as foreign security valuation and how to shield your net worth from excessive taxation. This blog will examine the basics, and we will be able to build from there.
Calculating your net worth is as simple as balancing your assets versus your liabilities. There are many tools online that can be used to automatically calculate your net worth, if you are aware of the market value of your assets and liabilities. Some of these calculators can be found here, and here.
Why calculate your net worth?
Your net worth is important to understand because it represents the difference between what you own versus what you owe. It sets the basis for what you are able to fiscally achieve, how much leverage you can assume and what kind of financial risk you can be exposed to. This is important in being able to secure credit for large investments or to be able to undertake riskier and potentially more profitable financial decisions. Your net worth provides a snap shot of your financial situation at a particular point in time. This can be extremely useful in monitoring your personal trajectory and ensuring that you are achieving the goals you had in mind. Without understanding your financial position, you are essentially driving down a road without any landmarks. You never know where you are or if you are even on the right road. The end point that you finish your journey at may not be your intended destination. And once you get to the end point, your car is running on fumes with little ability to correct course.
Goal setting and target net worth
Setting a target net worth makes planning for retirement, saving for your children’s education or planning your estate easier. There are number of ways of doing this – a basic one is using this formula:
Net worth = [your age-25] x [your gross annual income/5]
Calculating a base target net worth can help you set goals or monitor the growth of your lifestyle. Everyone should be able to live the lifestyle they want, and understanding your net worth is the key to protecting and growing your wealth for your entire life.
Thanks for reading!
If anything on this blog interests you further, please do not hesitate to reach out to me via email at [email protected] I’d love to talk about my financial services and advice in Vancouver, British Columbia’s lower mainland, and Canada in general.
- Brad Blair, CFP, CIM, FCSI, CHS.