Do you know your current net worth?
A net worth statement is a simple tool used by both professional financial planners and savvy self-planners to determine where you stand financially at any given time. This knowledge helps you determine what actions you can afford to take in order to reach your financial goals.
Essentially, a net worth statement takes the value of your total assets and holdings (your gross worth) and then subtracts from this amount all of your outstanding debt and liabilities. The resulting number tells you if you are in fact making money or losing it and helps inform your financial planning by determining what options are available.
Everything has changed over the last two years
From the emergence of the subprime mortgage crisis to present, the entire financial world has experienced an enormous amount of turmoil. Virtually everything with a tangible monetary value, from securities to personal collectibles, has faced significant fluctuations of value. While most people recognize this in the real estate market and in the stock markets, in reality almost everything has been affected in one way or another.
Further, the different types of assets have all seen their values change at different times and due to different pressures. Although one asset may have held its value during the stock market crash in September 2008, that doesn’t mean the same asset is still holding that value today.
Assuming the worst is over
Many analysts and much of the financial media have been watching the stabilization of the foreign markets – many of which are now in active recovery – as well as the performance of the U.S. stock markets. The conclusion that many of them are drawing from these is that the worst shocks of the financial crisis have passed, and though recovery will be slow, it is presently underway.
Nevertheless, there are still a number of wild cards that may disprove this optimistic assumption: declining foreign investment due to the weak dollar, a bursting of the commercial real estate bubble, or undermining consumer spending through increased household savings. These possibilities notwithstanding, many of the indicators suggest the worst may be over, in which case, it is time for people to reassess their individual positions.
Valuing your assets properly
One of the hardest parts of calculating your net worth is properly valuing your assets. Mistakenly overvaluing or undervaluing your current holdings can easily render your entire net worth statement worthless and give you a very mistaken view of your current position. This is always a problem for people calculating their net worth even in the best of times, but it is even more of a problem today due to all the recent instability. Basically any valuations that come from 2007 or earlier are worthless today, so in order to make your net worth statement worth the effort, you will need to go back and have all of your major assets and holdings revalued to reflect the current reality.