Why Understanding Your Net Worth is Important and Why It’s a Key Element in Your Financial Plan
Knowing your net worth is a key factor in planning for your retirement. Knowing what your net worth is and the effect it has on your retirement plan is an essential element to any well-rounded financial plan.
If someone were to ask you, would you know your net worth? It’s one of the most common terms in personal financial planning, but it’s one of the most important methods and benchmarks for an individual financial plan.
Net worth is a basic calculation that summarizes your current financial situation. Basically, the total amount you owe versus the total amount of assets you own is your net worth. People with assets that exceed liabilities will have a positive net worth and those with liabilities greater than their total assets would conversely have a negative net worth. Ideally, when you subtract the total amount you owe from your assets you’ll have a positive number. A higher number means a larger net worth.
If you were sitting in a math class, it would look like this:
Assets – Liabilities = Net Worth
Despite its importance, many people are not paying attention to their overall net worth, with many scrambling when they begin to approach retirement age. There are various assets used to determine one’s overall net worth, these can include:
- Money in your bank account
- The amount of cash on your person or home
- Any ownership stake you may own in a business
- Value collectibles (art, jewellery, and any other item of value)
- Real estate (this can also include cottages, investment properties, land and timeshares)
Just as there are many types of assets, there are also various elements of debt that must be accounted for when calculated your net worth. Common examples of debt include credit card, alimony, outstanding mortgage balance, taxes, car loans, and various other expenses.
In an ideal world, you should see your total net worth increase year-over-year, especially when you’re still gainfully employed. Partnering with an experienced financial advisor throughout the retirement planning stage is an excellent way to educate yourself on your current economics and design a realistic plan for the future. Typically, your savings will need to earn additional income in order to meet your retirement goals, so it’s best to start early.
One of the best ways to improve your net worth is to limit the amount of high-interest debt in your budget. That means that you’ll want to avoid high-interest credit cards and you should pay off any balances that you’ve already racked up. It’s common to have multiple credit cards carrying a balance, consider paying off the cards with the smallest amounts owing first. Holding on to debt will cost you money, it’s better to save and invest money as opposed to paying it in interest. Many of our clients with a lot of debt have benefited from consolidating debt into one lump loan. This can help save money and make your debt repayment plan easier to manage. Again, an experienced financial advisor will walk you through the various options and come up with a plan that’s best for your unique situation.
Your career isn’t going to last forever, and it’s important to maximize the amount of money you earn when you’re on the clock. It can be easier said than done but earning more money while working is the best way to save. It might be worthwhile to ask for that raise or take on a side job.
Regardless of your current situation, your net worth is an important gauge for your current financial health and it’s an important element in planning for the future. Net worth provides a black and white picture of your finances and will help you develop sound spending and saving habits. Goals are harder to achieve without measuring, and net worth is the best way to get an overall snapshot of your finances. Our team of Toronto and York Region financial advisors will work with you to develop a fully personalized plan. Your net worth today is important, but it’s more vital to have a sustainable plan that will see it grow to suit your needs over time.
Knowing your net worth is a key factor in planning for your retirement.
Learn what your net worth is and what affect it.