What’s Behind the Net Worth Door?

What’s Behind the Net Worth Door?

What can you learn from your Net Worth statement?  Net Worth statements provide a check for what is changing from year to year, but they also have some great hidden ratios that help you understand your patterns.  Here’s what to look for:

  • What changed from year to year?
    • If net worth went up in investments or reduction of debt, GOOD!
    • If it went up due to new possessions (like a car or home), NOT GOOD!
    • If net worth stayed the same, but debt went down, GOOD!
    • If net worth stayed the same, but debt increased or personal property increased, then you transferred savings to stuff. NOT GOOD!
    • If net worth went down, due to market changes in investments – no problem; if due to increased debt or reduction in savings, NOT GOOD!
  • Cash Reserves vs. Living Expenses: This is your emergency fund ratio.  Divide your available cash by required living expenses.
    • If it’s less than three months, NOT GOOD! You need to put a plan in place to accumulate funds.
    • If it’s over 3 months, GOOD! Compare it to your target of reserves – between 3 to 6 months. Talk with your coach about the right reserve target.
    • If it’s more than 6 months, NOT GOOD! It’s time to transfer some funds to higher earning accounts.
  • Qualified Plan Assets vs. Non-Qualified Plan Assets: This tells you your flexibility if your emergency funds get depleted.
    • Few non-qualified plan assets, NOT GOOD! It means you need to evaluate options in more detail like Roth vs. IRAs or credit limits, etc. for longer emergency periods. You may need a 6 month emergency reserve vs. 3 months.  Talk with your coach about setting the right reserves.
  • Personal Assets vs. Investment & Retirement Assets:
    • Divide your investment & retirement assets by your expenditures to see how many years of income you have saved. The closer you get to retirement, the more important this number is.
    • If your personal assets way overshadow your investment and retirement assets, NOT GOOD! (This ratio is age dependent)
    • If your investment and retirement assets way overshadow your personal assets, your financial plan may show you should enjoy your money more, GOOD!
  • Short Term Debt vs. other numbers
    • If your short term debt exceeds investment assets or appreciating debt, NOT GOOD! It’s time to ask your coach for a debt management/restructuring plan to see if we can whittle that debt away faster or more efficiently.
    • If your short term debt is less than your cash reserves, GOOD! You could pay it off tomorrow if you needed to.

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