Pattie Lovett-Reid: Understanding your net worth statement
Driving to the cottage I have a very specific job: not to keep asking, “are we there yet?” But to be more helpful, I figure out, on a number of apps I have, the most time efficient way to get there. In other words, I have to be helpful rather than a pain in the car.
I would suggest arriving at your financial destination is very similar to this – or getting to any destination. Without a concrete plan and options it is impossible to know if you have arrived, or even where and when to take corrective action if required to get there sooner.
Hitting financial goals is all about understanding your net worth.
In its simple form, your net worth is your assets minus liabilities. However, when determining your assets, not all assets are created equal.
Liquid assets are assets that can be converted into cash readily, such as cash and near-cash equivalents like GICs , savings accounts – even stocks and bonds, although depending on the market, a loss due to timing can be incurred.
Some might think assets should include items of value such as jewelry – and trust me, I’ve tried to justify a purchase that way – but in reality, personal property such as jewelry, clothing, and even cars will almost always be worth more to you than the resale value ever will be.
The other side of the balance sheet is your debts: credit cards, car loans, mortgages and even small business loans. This is where it gets tricky and how your balance sheet can get out of balance. A lifestyle that is based on frugality and low income can result in a strong balance while those with a high income and wild spending habits can clearly be a recipe for financial ruin.
So just what should your net worth be? Unfortunately, there is not a one size fits all. It can depend on whether your income continues to grow, but one thing is certain: your net worth will grow if you simply spend less than you earn. If your net worth and salary are low, continuing to save just a little and paying off debt are key.
Given the Bank of Canada seems to be getting closer to raising rates, and that the housing market has softened, now is the time to draw a line in the sand and say, “this is where I stand financially at this point in time.” Build your plan from there.