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Household Net Worth Planning: The Cornerstone Of Personal Finance
* When will the vacation start? * Where do I want to go? * What type of vacation do I want? * How much can I afford to spend on the vacation? In establishing your financial plan you need to ask yourself very similar questions to establish where you are financially, where you want to be in the future, and what financial resources you will have when you get there. The cornerstone of your financial plan is your household net worth statement. It is the starting point you use to measure your progress to your destination. If you don’t understand where you started it’s hard to measure if you have been successful. It is like being on a ship without a keel: Your moving but you don’t know if it’s forward or in circles. The Starting Point Measuring net worth is like taking a picture of you at a point in time. The net worth statement is a snapshot of your assets that will grow over time and used to fund your future needs such as when you are in retirement. There are four reasons why you should measure your household net worth: * To establish financial discipline * To create a strategy to achieve your goals * To measure progress towards your goals * To fee financially secure about your future Use the statement to establish growth targets for your net worth. Often your net worth will increase by paying down your mortgage, increasing your savings, or changing jobs. Calculating Household Net Worth Simply stated household net worth is simply the total fair market value of all of your assets you own such as your house, stocks, bonds, mutual funds, GICs (i.e. what you own) less your liabilities such as your mortgage, and loans (i.e. what you owe). The result is your net worth. What Do I Need? Start by pulling together all of your financial records: * Latest tax records * Bank statements * Credit card information * Other itemized living expenses * Brokerage statements * Mutual fund records * Mortgage documents and statements * Pension records * Loan repayment schedules * Insurance policies * Market value of any personal property This list may appear daunting and is not by any means comprehensive. However, once assembled it will help you calculate your net worth and help you lay the groundwork to begin planning for risks, savings, debt, investments, tax, retirement, and estate planning. Your net worth is then: NET WORTH = TOTAL ASSETS - TOTAL LIABILITIES The statement can really take any for you like. Accountants (such as myself) like to create statements that look like a balance sheet from a business. But use what works best for you and the format does not matter. Now Measuring Your Net Worth Success Your household net worth at the end of the year should be compared to the end of the previous of the year. * Was the growth rate expected? * Do you need to take steps to accelerate the growth rate or maintain it? * Is your net worth negative? Perhaps you need to get aggressive with debt reduction strategies. Article Directory: http://www.articledashboard.com David Carson is a professional accountant with experience in financial services, estate and trust, tax, and financial planning. Dean publishes two websites on personal finance: Personal Money Tips and The Personal Finance and Tax Blog. |
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