By Anthony P. Skvarka, CFP®, CPWA®, AIF®, Senior Wealth Advisor at Halbert Hargrove
What does net worth mean?
Net worth can be defined as the difference between assets and liabilities. It is one of the key metrics used with personal financial planning and is also helpful in measuring financial health and economic stability.
How to calculate net worth
To calculate net worth, start by adding up all your assets. Your assets should include the value of your home and other investment properties, bank accounts, investment accounts such as retirement accounts and taxable investment accounts, cars, jewelry, and collectibles. Then separately add up your liabilities – your home mortgage, car loan(s), other debt such as credit cards or student loans. You should also include any alimony or child support too.
The last step is to subtract your liabilities from your assets to arrive at your net worth. If the results are positive (more assets than liabilities), it may be a sign that you are currently on a path to building wealth. If it’s negative (less assets than liabilities), then it can indicate further action may be required. For example, it would be useful for you to know how much you may be spending on discretionary items like travel and entertainment that are contributing to your liabilities and exceeding your annual income.
Budgeting can be a helpful tool in managing your finances
This is where a budget can help to identify where your money is going. You may find after reviewing your spending that it’s possible to save more – up to the maximum – in your company’s 401k, for example. Saving more when you are younger also has the advantage of time: Compounding investment returns can be a significant factor in the growth of your portfolio! Investing early and often means that you may not need to save as much later to help overcome a possible shortfall as you near retirement.
Allocating your resources effectively is critical. It’s important to strike a balance between how much you may want to spend – discretionary items such as buying a new car – vs. how much you need to spend on taxes and other life requirements. This can go a long way in determining if you can cut back on spending and if you need to save more.
Critical impacts on net worth
Speaking of taxes – the impact of taxes must be factored into net Worth as well. Generally, there will be capital gains taxes owed on any asset sold at a gain, whether it’s your home or an investment in your taxable account. There are also annual property taxes to account for if you own a home. Withdrawals from retirement accounts (excepting ROTHs) will typically be treated as income and taxed, as well as the taxes you pay on your paycheck too.
Inflation and purchasing power also affect the strength and resiliency of your net worth. The current value of your assets now will not buy the same amount of goods and services in the future. Your investment assets that are allocated for long-term growth need to continue to appreciate above and beyond the annual rate of inflation.
Leaning on the assistance of professionals—and keeping abreast of change
It is important to also keep in mind that net Worth can and will change over time. It’s not uncommon to have a negative net Worth when you’re younger, building your career and starting a family. Often, starting out buying a first home can add significant debt in the form of a home mortgage, but as the home appreciates over time and you pay down the mortgage, your net equity in the home should start to exceed the value of the debt.
Net worth is an important measurement to track, but it is not the only one to pay attention to when planning for your financial future. Focus should also fall upon your short- and long-term financial goals, your expenses, and your income, including other sources such as cash flow from a rental property.
Need help getting started? Working with professionals can help you to get onto solid footing. Accountants can help to keep your taxes in order and make sure you are maximizing deductions where appropriate. Insurance agents can provide guidance to make sure your assets and liabilities are protected; estate attorneys will assist in appropriate titling of assets and legacy planning.
At what level of net worth should you get a financial advisor?
There’s no absolute ‘number’ – every individual’s needs and goals will differ. Investment advisors can assist with your short- and long-term financial planning, investing and budgeting, and help you navigate complex financial situations. Here at HH, we can advise you on all that and much more. We’re committed to staying attuned to your ever-changing life circumstances, in an effort to keep your planning and portfolio on pace.
Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
