Many investors can quickly recall their annual income, the value of their home and other measures of how they are doing financially. But when it comes to knowing their net worth, the same investors may be scratching their heads. It’s important to know your net worth — and monitor it periodically — because net worth is the most important gauge of whether you are building wealth over time.
A Quick Tally
Your net worth is what’s left over when you add up your financial assets and subtract your financial liabilities. Your assets may include money in bank accounts, stocks, bonds, mutual fund shares, retirement accounts and the value of any real estate you own. Your liabilities should include all of your debt, such as your mortgage, credit card debt, student loans or auto loans. You may need to include assets and liabilities of your spouse or partner to get a complete picture of your family’s finances.
Net Worth Worksheet
The worksheet found at the end of this article will help you tally up your net worth. The result may help you put your affairs in perspective when you consult your financial advisor about a strategy to increase your net worth over time.
Measuring Your Progress
When monitoring your net worth, it’s important to remember that there is no magic number. What is important is taking steps — such as investing as much as you can afford and limiting debt — that are likely to increase your net worth over time.
If you have discretionary income to invest, there are many types of accounts where you can put these funds to good use. Qualified retirement accounts, such as an IRA, may permit you to build wealth over time and also provide significant tax advantages.1 For 2007, the maximum annual contribution to an IRA is $4,000 plus a $1,000 catch-up amount for investors aged 50 and older.
There are also numerous opportunities to invest in stocks and bonds in a taxable brokerage account. Regardless of how your funds are invested, the more you have in the way of financial assets, the more you are able to benefit from the power of compounding — when your earnings are reinvested and potentially earn even more over time. Your LPL Financial Advisor can help you create a mix of investments that is suitable for your risk tolerance and time horizon.
Debt: A Drag on Your Net Worth
Of course, it’s difficult to find the money to invest if you are making significant payments on car loans, credit cards and other forms of debt. If you have revolving debt, paying more than the minimum each month may permit you to pay off the debt early and potentially save thousands of dollars in interest. You may want to consider a similar strategy to retire your mortgage if you own a home.
Net Worth and Estate Planning
Your net worth can also help you determine whether your estate may be subject to federal estate taxes upon your death as well as shed light on the potential wealth you may be able to pass on to your beneficiaries. Your estate typically includes the value of your assets, minus your liabilities, at the time of your death. Your estate also includes the death benefit of any life insurance coverage you may have, so be sure to include life insurance as an asset to get the most complete picture of any potential estate tax liability and the wealth you may be able to pass along.
Federal estate tax rules are particularly confusing in the coming years. In 2007 and 2008, the first $2 million of an estate is generally excluded from federal estate taxes. In 2009, that exclusion rises to $3.5 million. Then, in 2010 only, federal estate taxes are repealed entirely. Beginning in 2011, the exclusion goes back down to $1 million. Also worth noting is that many states impose their own estate and inheritance taxes. With that in mind, it may be prudent to enlist the help of an attorney specializing in estate planning to ensure that your overall estate plan is in concert with various tax rules and your goals.
Keeping Tabs on Your Net Worth
You may want to consider tallying your net worth at least once a year to stay focused on your most important number. Your financial advisor can help you analyze your net worth and develop a long-term strategy for building wealth.
This article is not intended to provide specific advice or recommendations for any individual. Consult your financial and tax advisor, with questions. John Bennett Petrick and the investment representatives of Perennial Financial Services are registered representatives with and securities are offered through Linsco/Private Ledger (LPL) Member NASD/SIPC. Linsco/Private Ledger representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of Linsco/Private Ledger Corp. CA Insurance License #0E03441
Net Worth Worksheet
As of mm/dd/yy
Your Financial Assets:
Bank accounts (savings and checking, money markets, CDs).................. $_________________
Retirement accounts (employer plans, IRAs, pensions)........................... $_________________
Primary residence................................................................................ $_________________
Life insurance cash values.................................................................... $_________________
Other (stocks, bonds, nonresidential real estate, business interests).......... $_________________
Total Assets...................................................................................... $_________________
Your Financial Liabilities:
Loans (car, student).............................................................................. $_________________
Credit card balances............................................................................. $_________________
Mortgage............................................................................................. $_________________
Other................................................................................................... $_________________
Total Liabilities................................................................................. $_________________
Your Net Worth................................................................................. $_________________
(Subtract liabilities from assets)
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