We sometimes find it hard to get our clients to focus on the main thing. In this day in age, it’s so easy to track performance of an investment that some lose sight of the big picture. Sure, rate of return is absolutely important. But does your rate of return really tell the whole story? We don’t think so.
In financial planning, we believe one’s net worth is the best barometer of financial health and success over time. Do you know your net worth? Add up all your assets and subject all your liabilities. What is a good net worth number? Well that’s relative. We would suggest that a healthy net worth accounts for a couple different variables such as your age, your phase of life, your income and your future spending needs, wants and wishes.
But no matter whether you’re in the asset accumulation phase of life, or conserving/ distributing assets in your twilight years, here are 7 reasons why net worth should be your barometer for measuring financial health, and not your annual stock market returns.
- Asset Appreciation – Just like tracking a specific portfolio’s performance net worth does account for the appreciation of assets. Whether it’s a stock, a car, your home or an antique, we all should want to see our assets go up in value over time.
- Debt Reduction – Net worth also accounts for debt reduction. Think of your house. Not only are you hoping the real estate value increases, but with each payment, you reduce your liability and increase your equity. Debt can be leverage, but net worth helps keep your debt in check too.
- Tracks Savings – One sure-fire way to increase net worth is to spend less than you make and save the difference. Year over year savings goes directly towards the bottom line and is accounted for here too.
- Judges “Real Dollars” Return –We emphasize the percentage return on assets all too often. It’s the return in real dollars that matters. Who made more money? The person who made a conservative 4% on a $1,000,000 or someone who made 30% on $100,000?
- Tangible and Illiquid Assets Included – This one is for the farmer with land and the collector of classic cars. These assets can be very variable, even though their value doesn’t show up on a financial statement each month.
- Business Interest/Business Assets – Those of us that own businesses know that there are times when our bank accounts are lower than we like because of the investments we make in our craft. But our businesses have a value too.
- Addresses the Main Thing – The two most important questions in retirement planning are how much do I need to have to retire, and will I run out of money in the end? For us as planners, net worth helps track both these key questions over time.
In summary, we suggest you find a convenient way to track your net worth year over year. It tells a much clearer story of your financial health and financial progress, much more than your annual percentage rate of return. And if you don’t have the tools, time or expertise to do planning this way, consider giving us a call. That’s why we are here – to help you keep the main thing the main thing and align your personal values, vision and wealth.