How Your Finances Stack Up
Do you know how well you're doing financially? Surprisingly, many of us have no accurate idea, because we've never taken the time to figure it out.
It's not that difficult to get a handle on your finances. And knowing where you stand in your financial and investment life is vital because it dictates your strategy going forward. If you don't know where you are today, you can't plan your future.
One of the best ways to measure financial success is to calculate your net worth. This is the value of everything you own, less everything you owe. Net worth provides a picture of your financial life because it shows where your finances and investments stand at a particular moment. (If you're a couple, make this a family project-including your and your spouse's assets and liabilities.)
While determining your net worth isn't as complex as it may sound, it can take time. Gathering information is the hardest part of the process.
To get started, determine the current value of everything you own. This includes your investments, house, cottage, car, collectibles, expensive jewellery and anything else of lasting value. On the investment side, be sure to include your Registered Retirement Savings Plan (RRSP), individual securities, mutual funds, employee shareholder plans, deferred profit sharing plans and real estate. Include the cash value of life insurance policies and workplace pension plans. If you are owed money, count it as well.
Now do the same for debt. How much do you owe on your house, consumer loans and other debts? Include credit card balances, lines of credit and investment loans. If you owe income tax, include it, too.
And don't forget that you'll eventually face income tax liabilities on some of your assets, including the income generated by your RRSP and capital gains earned when you profit from non-registered investments. These aren't easy to calculate in advance, because you don't know what your future tax situation will be. But these tax liabilities will eventually affect your wealth pool and retirement income.
Now do the math. Calculate the total dollar amount of assets and liabilities. Then subtract liabilities from your assets to come up with your net worth.
If your finances are in good shape, you should own considerably more than you owe, resulting in a substantially positive net worth. If you come up with a negative figure, it's a sign that you have some serious work ahead of you.
Of course, your net worth will vary with age, income and other factors. For example, a negative figure may not be so bad if you and your family are young. You may have just bought your first house and are facing the costs of raising children. You still have plenty of time to build assets.
But in your peak earning years and beyond, you should have a comfortable cushion in savings, investments and RRSPs. These should far exceed debts, particularly if the mortgage is close to being paid off.
It's important to have a solid positive net worth because this points the way to your financial future. The more you have, the more comfortably you can retire. You can enjoy life more today, or leave a larger legacy through your estate.
If you don't like your financial snapshot, speak to your financial advisor. Get to work as soon as you can to improve the picture.