Great article on why tracking net worth is the best indicator of whether
or not you are making financial progress (which helps explain why Legacy Tracker helps you track, document and safeguard your
important documents & information AND calculate your own net worth)
Some say it's the most important number in
personal finance. And net worth isn't just a term that applies to the rich and
famous. It plays a key role in financial planning regardless of how much money
you have in the bank.
"You want your net worth
to increase over time, whether it's currently negative or positive," says Rogers Group certified
financial planner Cecilia Tsang. "A person's net worth is basically the
value of what you own — which are your assets — minus the value of what you
owe, your liabilities.
"To determine your assets, you would
add together your liquid assets — things that you own that can easily be
exchanged into cash — as well as any fixed assets such as real-estate
property," Tsang says.
Once you list your assets, it's a simple
matter of subtracting your liabilities (such as outstanding mortgage,
credit-card, and car-loan balances). Here's an example of someone going to
university:
ASSETS (What I own)
Savings account $2,520
1987 Honda Accord $1,000
TOTAL ASSETS $3,520
LIABILITIES (What I owe)
Student Loan $7,000
MasterCard
balance $80
TOTAL LIABILITIES $7,080
Net worth equals assets ($3,520) minus
liabilities ($7,080). So this person's current net worth is -$3,560.
"As this person finishes school, finds
work, saves money, and pays off her loans, her overall net worth is going to
increase, first to zero, and then it will hopefully become positive and
continue to grow over time," Tsang says.
A continual increase in net worth
represents good financial health, while someone's net worth can be depleted if
there's a significant drop in asset values compared to liabilities.
There are several on-line tools to
determine your net worth. (Just Google
"net worth calculator".)
Why does it matter?
Net worth might not seem that important if
you're early in your career and having a family. But it's worth keeping an eye
on your net worth as it will play a crucial role in your retirement.
At some point, you'll need to draw on the various components of your net worth
to cover living expenses. For instance, without an income you may need to sell your home and
downsize.
Plus, life can throw
curveballs — say you lose your job, become unable to work, or your
house value plummets because of some unforeseeable circumstances. You want to
know exactly where you're at with your net worth so that you're prepared for
tough times.
To put net worth into practical use that
will guide future financial decisions, keep these tips in mind:
Track it regularly
Consider using a tool such as NetworthIQ, which bills itself as a "social
personal finance manager". It allows you to monitor and track your net
worth in a non-intimidating way.
Update your net worth every year
Your net worth will fluctuate, and regular
updates will help you keep on track with your financial goals. Consider it a
financial checkup, just like going to the doctor for your annual visit.
Compare cautiously
There's always a temptation to see how
you're doing compared with other people — consider the average household
net worth in Canada was $363,202 in 2011 — but avoid obsessing over
how your net worth stacks up next to others'. Focus on your own situation so
you don't get sidetracked trying to keep up with the Joneses.
How can you boost your net worth?
"There are many ways to grow your net
worth," Tsang says. "If you have debt, work on paying down your
debt."
"Save for the long term, into Tax Free
Savings Accounts as well as into RRSPs, which are both tax-sheltered," she
adds. "The more you increase what you own and decrease what you simply
have, the higher your net worth will be."
The best way to save or pay down your
debts, Tsang notes, is to do so systematically and automatically.
"For example, direct $50 a month into
your TFSAs…or
have it automatically paid into your student loan. You won't miss having it
taken out of your account because you wouldn't have seen it in the first place.
"As your income grows, increase your
savings or debt payments according to the same proportion," she adds.
"If you do this early on, you'll get into the habit of 'paying yourself
first for later'."
Gail Johnson | Insight-Yahoo Finance Canada By – Fri, 23 Nov, 2012 12:19 PM EST 
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