In my January 4, 2012 post I shared nine steps to get a start on improving your financial health in the New Year. At the top of the list was:
Take score: review your net worth as compared to one year ago
I must admit, I don’t find myself playing too much golf these days. However, when I do, I keep score to see how I am doing. A net worth statement is your financial scorecard. In its simplest form, your net worth statement lists what you own, subtracts what you owe, and the balance is called your Net Worth. While there is no ideal Net Worth, it certainly is better to have a larger positive Net Worth – thus owning more than you owe. Next to establishing personal financial objectives, an evaluation of what you own and owe is probably the most important ingredient in creating a plan your financial future.
From the information contained on your Net Worth statement, you can measure whether or not you have sufficient liquidity, calculate your debt/equity ratio, review the nature and diversification of your assets, and determine the impact of federal estate taxes on your estate. Your Net Worth statement is also used in your Financial Independence analysis and in evaluating your insurance needs. With proper planning, discipline and careful monitoring, your Net Worth is likely to appreciate in value over time.
Even in a year when investment returns are flat, your net worth can increase if you are saving money and/or paying down debt such as a mortgage, college loans, auto loans, or dreaded credit card debt. There are many resources online to help you keep score. Even better yet, you can work with your financial advisor to begin tracking your progress.