Tracking your net worth over a period of time can help you keep a cool head as you work toward building your wealth. By looking at the big picture, you don’t get as discouraged when an investment stumbles, as long as other investments are still gaining in value. Knowing that hitting a bump in the road doesn’t mean you’ll fall short of your destination can help get you back on track to meet your long-term financial goals.
How does this work? Don’t simply complete one net worth statement and call it a day. Here’s how to look at your net worth:
Commit to calculating your net worth periodically.
This can be quarterly, semiannually, or annually. More frequently than quarterly is overkill; less frequently than annually may put you way off course when you do review your position.
Calculate your initial net worth.
The difference between your assets and your liabilities is your net worth, which is what gives you stability in times of financial uncertainty. Your net worth statement summarizes what you own, what you owe, and what would be left if you paid off all debt. Assets include money, investments, the fair market value of your house and furniture, your car, other real estate, and anything else you own.
Liabilities include mortgages, car loans, credit card debt, and any other amounts owing like taxes. Here’s how to determine your net worth:
Net worth = Assets – Liabilities
Re-calculate your net worth at the next calculation period.
Tracking your net worth periodically through the ups and downs in the economic cycle can prevent you from losing sight of your financial progress.
Compare the changes in assets, liabilities, and overall net worth.
Are you getting closer to your goals or farther away from them? Make a point of understanding the general direction of each category. Are your assets lower now because your investments are down with the market? Or are your investments down while the market is up? Are you spending more than you’re earning and depleting your assets to cover your living expenses?
Identify where you have control over improving your financial direction.
Find out whether you’re increasing your assets through saving or decreasing your assets through spending or whether your invested assets are growing at the rate you expect, as well as how you’re doing in your quest to eliminate your debt and taxes.
Plan actions to increase your net worth before the next review period.
Think of your lifetime income and earnings as a pipeline that flows from when you start making money to the last day of your life. Along the way, various faucets in the pipeline open and divert money to pay for needs (such as living expenses, a home purchase, taxes, education, furniture, and transportation) and wants (like big-screen TVs, vacations, a fishing boat, and more).
For items you buy using debt — mortgages, loans, credit card purchases — the faucet opens wider and runs longer because you’re paying not only for the item but also for interest. The result is that you have to either work longer to earn more money to repay the debt or scale back on your goals.
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Source:http://www.dummies.com/how-to/content/quick-tips-for-tracking-your-net-worth.html
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