How Much Are You Worth?
When people refer to, say, Microsoft as a "$30 billion company", what exactly do they mean? Some would say it's in terms of total revenues, others total assets or market value.
But when they refer to Bill Gates as being "worth $100 billion", you know what it means -- net worth, i.e. assets minus liabilities.
When it comes to the definition of wealth for individuals, most agree it's net worth. Not their annual income. Nor their total assets. There's another definition I learned from a recent seminar that's even more to the point. But I'll share that next issue (yes, I am tricky!).
You now know where you want to go. This time, you need to know where you are. And the starting point is knowing how much you are worth (financially, that is...remember, your self-worth has nothing to do with your net worth).
For that, you need to come up with your personal balance sheet. I'm sure you know what it is. Some call it a statement of assets and liabilities. Elected government officials (mis) declare it.
So that's what you have to do right now: declare your assets (what you own) and liabilities (what you owe), and the difference is your net worth (what's left over).
Use a spreadsheet for this. Or just use pen and paper (a notebook that you can keep confidential). But since I'm really nice, I made a worksheet just for you (see Toolbox at the top left).
Assets
List all your "liquid" and "appreciating" assets. That means cash (or cash equivalent), investments, real estate, and business equity. Beside each, enter the amount.
For cash (cash on hand, savings deposits, checking accounts) and cash equivalents such as CDs (nope, not your Celine Dion Greatest Hits CD...I mean certificates of deposit) and other money market accounts (like time deposits and T-bills), check with your bank. If you have foreign currency deposits, get the equivalent peso value. If you own a whole life insurance policy or an endowment plan, find out what the accumulated cash value is.
For investments and real estate, find out the current market value. Log on the Internet or make the necessary calls for stock prices and net asset values (NAV). Your paper's business and classifieds section can also help (for prices of stocks, NAV of mutual funds, and average selling price of similar houses in your area or other real estate property you own).
You may want to include preneed plans you have, like an educational plan. They're not appreciating assets, rather they are prepaid expenses, which in business accounting counts as an asset until used. They are, after all, funds you saved for future use. If you own a business, include what your business is worth (or compute your equivalent share in the business).
Now, notice I didn't include most personal property like cars, furniture, electronics, clothing, and your Celion Dion CD collection. Why? These are "depreciating" assets, i.e. they go down in value. Sure, you can still sell them, but they represent an expense for you, not assets that go up in value (unless your Celion Dion CDs become rare collectibles 50 years from now).
A few personal finance experts would even exclude from your net worth calculation some appreciating items like jewelry and art work, and even your house. Mainly because they don't provide liquidity for you to live off them. So if you want to be conservative with your calculations, exclude them. But I recommend at least including the value of your house.
Liabilities
Next, list all your debt. This includes both secured (loans with collateral) and unsecured debt.
Secured debt includes the mortgage on your house (and other real estate investments), your home equity loan, and auto loans.
Unsecured debt includes your credit card balances, personal loans, salary loans, and SSS and PAGIBIG loans.
Net worth
Finally, deduct your total liabilities from your total assets and you have your net worth. Tada!
Do you feel rich? Maybe you just found out you're a millionaire, even if it's just on paper (especially if you listed your house as an asset). Congratulations! Or perhaps you discovered you're not worth much financially, even if you're a high income earner. Well, we'll get to that next week.
At least now, you know where you are in your financial life. Compare where you are (personal balance sheet) with where you want to go (financial goals).
Do you want to own a house in 10 years? An educational fund for your toddler? Money to travel to Europe by yearend? Retire at 50? A Range Rover next year? A home theater system this year?
Check your assets. Can your assets finance these goals? No? Not enough appreciating assets? Maybe your assets are not liquid enough. Maybe now realize you spent too much on depreciating assets. Or your debt is too high that it eats up part of your investments.
Most likely, you'll see a gap between what you have right now and what you want to have. Maybe a huge gap. Depressed? Go on, wallow in self-pity. When you recover (and I hope it should be right about now), remember you want to gain control over your financial life. And this is what's financial planning is all about.
Next issue, we'll do your personal income statement, or to be precise, your personal cash flow statement. This will be another eye-opener. Reality bites? You betcha.
