Have you ever experienced entering a destination into your GPS, only to discover that your phone has no service? In this situation, the little blue dot representing your location keeps moving randomly on the map desperately trying to find your coordinates. Even though your GPS knows where you’re trying to go it can’t even provide you with the first step, because it doesn’t know the starting point.
Building a financial roadmap is no different. It can be a challenge to understand your next move when your present financial reality is uncertain.
We’ve found the best way to build a path forward is to get super clear on where you’re at today. And the best way to do that - is to calculate your net worth.
What is Net Worth?
Net worth is what you own minus what you owe, representing your equity. To calculate it, create a balance sheet by listing "Assets" (what you own) on the left and "Liabilities" (what you owe) on the right.
Common assets include home value, retirement accounts, bank and investment accounts. Liabilities encompass debts like mortgages, student loans, and credit cards.
Simply subtracting total liabilities from assets gives your net worth, providing a crucial starting point for your financial assessment.
Assets - Liabilities = Net Worth
Perfection, The Enemy of Progress
Chances are, you're familiar with the concept of net worth. Perhaps, you've even had meetings with financial advisors requesting 25 statements and the DNA of your oldest child just to get an answer to your question. I exaggerate, of course, but it highlights the perceived complexity of our industry that leads to frustration for the client.
However, gaining insights from investment professionals doesn't have to be that intricate. Emphasizing the value of time, the goal is progress, not perfection, at this stage of your financial journey. Approximations are acceptable as you navigate this phase.
What Does My Net Worth Mean?
Calculating your net worth offers guidance for your next steps, highlighting which cashflow elements to prioritize (Outlined next in Part 2: “Controlling Cashflow”). For instance, your savings might be healthy, and your assets growing, but it could reveal that taxes have become a source of frustration. Understanding which levers to pull with tax planning is much easier when your balance sheet is in order.
Your net worth serves as a foundation for monitoring your progress toward financial independence. For instance, a quick "back-of-the-napkin" retirement analysis can be applied by calculating your Total Term score, a measure of financial independence. Total Term estimates the number of years you could live on your current asset if they did not grow (ignoring inflation, taxes and fees). This includes cash, investments, business equity, and real estate equity.
The example image shows a total net worth of $1,428,746 and annual living expenses of $117,564. To obtain the total term score for this individual, we simply divide the living expenses by the net worth to reach a total term score of 12.2. Said another way, it's projected that this individual could live a little over 12 years on their current assets.
This week’s blog post is an excerpt from our free E-Guide: The Law Firm Owner’s Jumpstart Guide to Ultimate Wealth. If you enjoyed this article, you would love the full guide - Get your copy here.
Disclosure:
First Light Wealth, LLC (“FLW”) is a registered investment advisor offering advisory services in the State[s] of Pennsylvania and in other jurisdictions where exempt. Registration does not imply a certain level of skill or training.
The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.
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