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Building Wealth

What's Your Net Worth?

Fretting over your finances can be discouraging. Some people would rather not know the whole picture when it comes to how much money they have saved versus how much they owe. A Swedish proverb offers: “Worry often gives a small thing a big shadow.”

Financial stress comes in all sizes, and this is not to downplay its significance in your life. However, unless we can find a way to quantify our personal financial situation, we will struggle to get on a positive financial footing. Another way to say it is: if you can measure it, you can manage it. 


Using Net Worth as a Scorecard 

Understanding and calculating your net worth on a regular basis (once a year should do it) is a good way to quantify what you own versus what you owe.


Your Assets – Your Liabilities = Your Net Worth


Tallying your liabilities, or putting a number on how much money you owe, can be a concerning thought. However, it’s the first step in building financial wealth and shouldn’t be avoided. Don’t be discouraged if you find yourself in a negative net worth situation. This is not uncommon. A mortgage payment in its early stages can be a significant liability when compared to your assets. A college loan for someone fresh out of school is likely to dwarf what a person will make when accepting their first job.

The key is to make sure you are on a positive path to building net worth over time. Increasing your assets (and/or decreasing your liabilities) by 5-10% annually is an example of a short-term wealth building goal you can set for yourself.

Your money habits should support your personal values, priorities and needs. You may have heard this in the past, but having a large net worth and successfully managing your money isn’t dependent on how much money you earn, but how much you keep. Paying the interest on personal debts for too long will work against the dual goal of increasing assets and decreasing liabilities.


Some Basic Wealth-Building Tips

Once you have determined your net worth, there are several suggestions for increasing your wealth, that can translate into less worry about finances and better financial security in retirement.

Start Saving Now   Early is always better when it comes to saving. The earlier you start saving, the longer your money has to work for you by earning compound interest and providing a safety net for short and longterm financial surprises.

Make Savings Automatic   You’ve heard about “paying yourself first”. Talk to your bank or employer about starting automatic deposits to your savings account from your paycheck or checking account. Many financial institutions offer this service for free. By systematically setting money aside for yourself before paying bills is a great way to prevent your hard-earned money from being lost to the types of unneeded spending that do not support your long-term financial goals.

Live Below Your Means   According to The Survey of Consumer Payment Choice, conducted by the Federal Reserve, nearly 46% of credit card holders carried an average unpaid balance at the end of the month of $3,389. Companies spend a lot of time and resources figuring out how to tempt us to spend our money on their products. Refraining from purchases that are outside of your personal goals, and redirecting that money to savings, will provide a healthy return toward your financial security.

Ditch Credit, Pay with Cash   According to the Federal Reserve Board’s May 2011 report on consumer credit, Americans held $793.1 billion in revolving credit card debt, or roughly $15,799 per household with credit card debt at an average interest rate of 13%. So for every $100 you charge, you’ll end up paying $13 more than if you had paid in cash. That credit card debt keeps you from building wealth and should be paid off as soon as possible.

Individual Retirement Accounts   If your employer offers a 401(k), 457 or other similar retirement savings plan, participate in it. This is especially important if your employer offers some type of contribution match. Retirement accounts, such as SoonerSave for state employees, have multiple financial and tax benefits.

 


This article was first published in the Winter 2012 edition of the Retiring Right newsletter. Click here to view other newsletters. Not receiving your newsletter, update your address by completing the Change of Address form.

 

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