The
consequences of squandering versus saving money, the effectiveness of money
management skills, and the profitability of your business ventures, are laid
bare. The net worth statement is the yardstick measure of our ability to own
versus owe.
The importance of estimating your net worth.
Adding up the negative side of your net worth statement will reveal your liabilities
in comparison to your assets. Subtracting your total liabilities from your
total assets will give you the difference–– this is your net worth––either
positive or negative. Here are a few sound reasons for periodically assessing
your net worth:
1) Offers a snap-shot debt analysis. Debt
totals warn against spending beyond our means. Compound interest on a growing
debt portfolio, at 18 to 28% can put a strain on your cash flow. After you
review this debt, establish goals to reduce it.
2) Investment planning results are revealed.
Your net worth statement will reveal all of your accumulated assets, including
your RRSP and non-registered investments, putting them all into perspective.
While employed, you have an opportunity to save for your retirement years
that are fast approaching––you aren't getting any younger!
3) Reveals any need for further financial planning.
How can you possibly calculate how much to save for a home, pay for your children's
education, or provide for renovations unless you have a reality check? You
must initially picture each need in contrast to your net worth snap shot.
What have you saved for each future goal? Where has your income been going?
Do you have home equity built up or do you still have a large mortgage. Once
you determine what your goals are, establish where certain percentages of
your money need to be allocated, for example, to pay down credit cards. If
your investments are not going to give you enough capital to retire on, perhaps
you need to increase your investing instead of buying that new car, boat,
or motorcycle.
4) Estate & tax planning. Before drafting
a will designed to leave distinct assets to heirs, it is prudent to know your
net worth. Capital gains liabilities such as estate taxes on a family business
or vacation properties, and full taxation on RRSPs left in the estate, may
prevent a smooth transfer of assets to your heirs. So assess the tax liabilities
on your assets now, and calculate your estate’s tax debt. (Life insurance
offers the easiest solution for projected estate related tax debts).
5) Business planning. Succession planning
simplifies the transfer of a family's business assets to the next generation.
Often a simple life insurance planning maneuver can ease the affect of capital
gains tax or provide for a future buy-sell agreement upon the death of the
principal business owner.
Estimating your net worth
Your net worth statement is calculated by subtracting the
sum of your liabilities (what you owe) from the sum of your assets (what you
own). The difference is your net worth. With a little homework, evaluate the
current market value of your major assets such as your home, other real estate,
and investment holdings. As well, define your liabilities.
Since your net worth can be stated as both personal and joint
in marriage or a common law partnership, consider:
• where there are jointly held assets and joint liabilities,
create one statement including both partners’ share of assets and liabilities
separately assessed, and/or
• another statement with only your share of asset ownership
and/or liabilities, or
• a unified statement with both partners’ shares
of assets and liabilities combined.
Summary review
After you have compiled your lists, subtract your liabilities from your total
assets. You have now completed your net worth statement. The final figure
represents your financial net worth.
Evaluating annual net worth increases
In view of your retirement.
Year by year increases in your net worth may give you a false sense of achievement.
It would be an erroneous assumption if your net worth gains appreciated primarily
due to the inflated value of your principal residence. For retirement purposes,
watch the value of your RRSP investments and any non-registered retirement
assets; and closely monitor those values against the negative effects of inflation.
A close eye on these components will give you a better idea if you are reaching
your retirement goals.
