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Question: What information should I use to determine my net worth?
Answer: In the day to day life in which we all live we tend to get into the routine of go to work, come home for supper and a little time with the kids, sleep and repeat. Who has time to work about finance? Many times we find ourselves making ends meet, but not making a lot of progress. How can we measure our financial progress? We should treat our work and the flow of money through our family like a business. Also, like a business we need to evaluate our progress periodically. A very good way to do this is by doing an annual net worth statement similar to a business. This sounds complicated, but is not. I first did this in 1981 and have been doing it at least annually since then. The advent of computers and spread sheets has made this very simple.
Take a sheet of paper and draw a line down the middle.
On one side write down all of your assets — Assets are anything of value and include cash in bank accounts, mutual funds, CDs, bonds, cash value of insurance policies, estimated value of all properties owned etc. Include the value of your home even though you owe a mortgage.
On the other side write down all your liabilities — Liabilities are what you owe, loan balances, credit card balances, car loan balances, mortgage balances — essentially any financial obligation you have.
Once you have totaled each side up, subtract liabilities from assets. Look at the result. This your net worth. Hopefully you will have a positive number. If your liabilities exceed your assets you technically are bankrupt.
The utility of this exercise is to know where you are financially and if you are making progress. From year to year you want to see an increase in your net worth. Every spending decision then can be made relative to your net worth. Will this decision increase or reduce my net worth? That is something you need to know. That is what good businesses do. You owe it to your family to know where you stand financially at least annually. Using this method for 40 years since 1981 has helped our family make sound financial decisions, put three kids through college, provide for charitable giving and fund our retirement. Try this simple method. It will open your eyes to your financial situation.
Frank Anderson recently retired and has succcessfully used this net worth technique for years.
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