#2: How to Use Your Net Worth Statement to Manage Your Financial Life [Podcast]


Do you struggle to make financial decisions because you can't get a handle on all the complexities of your life?  In this episode's PLAN WELL segment, I show you how to use a net worth statement to make more informed financial decisions.

A net worth statement is an essential tool for tracking your financial progress from year to year and for making smarter financial decisions.

Your net worth statement reflects the amount by which your assets (what you own) exceed your liabilities (what you owe). If you don’t have a net worth statement, here’s how to create one.

  1. List your assets (what they are, who legally owns them, and their value). I choose to list assets in three categories: a) taxable assets; b) tax-deferred accounts; and c) tax-free assets. Assets include home(s), vehicles, checking and savings accounts, cash, personal property and other investments. When recording your assets, be conservative with estimates. Inflated values of large assets (home and vehicles) might look good on your statement, but these inaccurate figures only skew the net worth figure.

  2. List your liabilities (what they are, who legally owes them, the balance owed). Liabilities may include mortgage, credit card debt, home equity loans, car loans, and/or other loans. (For a complete list, see the Build Your Net Worth worksheet.)

  3. Your net worth is the number you get when you subtract your liabilities from your assets.

You should update your net worth statement every six months so you can easily correct your course along the way.

Why is it essential to track your net worth?

  1. It virtually gives you your entire financial picture in one place. This quote from Ralph Waldo Emerson says it best: “Your actions speak so loudly that I cannot hear what you say.” There’s no guessing when you see it in print.

  2. It equals the sum of all of your financial decisions over time. While it’s possible to increase your income and assets in the course of a year, if you spend more or increase debt, your net worth will reveal that.

  3. It allows you to identify opportunities and risks in your financial life. An updated statement helps you balance your investments and liquidity.

  4. It’s a much better tool to track your financial progress over time than your investment accounts. The ups and downs of the value of investment accounts do not always reflect financial health.

INVEST WISELY: What is investing really about and what can it do for you over the long term?

Over the last 25 years investing has become more about “wealth creation” through investing. This focus led to many people investing too aggressively. Somewhere between the dot-com bubble of the late 90s and the more recent economic crisis, we became disillusioned.

Historically, the creation of wealth came from hard work, enterprise, creativity, disciplined spending, and savings. The purpose of investing was to preserve and grow the wealth WE had created through our efforts and disciplines.

To INVEST WISELY, this historical perspective is important for you to consider for these reasons.

  1. It keeps the focus on the true driver of wealth creation—YOU. It’s about how you develop your career, how you serve in the marketplace, what value you create, what you do with the rewards from your enterprise, how you spend monies and how disciplined you are in your savings.

  2. It allows you to be a less aggressive and more consistent investor. Instead of looking to your investments to drive wealth creation, you can be less aggressive and more balanced and consistent in your investments.

  3. You’re more likely to benefit from the true power of investing. Investing done right should not be exciting. Prudent investing reflects the power of natural growth. It positions you better to invest more consistently over time and to take advantage of capital markets.

  4. It's simpler. Taking the historical perspective in investing is a lot easier, less expensive and less stressful.

To PLAN WELL and INVEST WISELY, treat investing as the preserver of wealth not the driver. Remember, YOU are the driver.


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