Every financial planner will tell you that knowing your current net worth is the first fundamental step in financial planning. Taking stock of who you are and where you stand will help you to determine your financial goals and dreams and towards a realistic and practical financial plan.
You need to put down in paper all your current assets and liabilities to complete your net worth statement. Your current assets will include your home, bank accounts, saving accounts, real estate investments, stocks, bonds, cars, and everything else that you possessed. Your liabilities will include the mortgage on your home, real estate loans, loans on retirement funds, car loans and any other debts you have.
Why is computing and tallying your net worth so important in financial planning? The two situations below will help to explain this important aspect of financial planning:-
1. If your net worth shows that you are technically a bankrupt.
This probably implies that your outstanding debts on the house mortgage, real estate loans, loans on retirement funds, car loans and any other debts you have outstripped your assets. Hence, your first priority in seeking financial freedom is to seek ways to reduce and retire these debts through managing your budget which will include changing your lifestyle to reduce unnecessary expenses.
2. If your net worth show that is positive.
This will probably implies that you may have some spare funds for your investment planning, or in a enviable position will be able to commence generating a special fund for investment planning. This can be done through a well planned budget diligently carried out with the utmost discipline. Investment planning is one important aspect of financial planning which cannot be overlooked. Putting spare funds into fixed deposit accounts for the short may be fine but for the long term, low yielding financial instruments are not the wisest thing to do.
Hence, knowing your current net worth is the first basic step in the financial planning exercise imperative in your journey towards achieving financial planning. Listing your net worth in a spreadsheet will facilitate the monthly or yearly monitoring and tracking of your net worth.