personal wealth health

The Other Side of the Ledger

Consider all debts and liabilities when calculating net worth.

WILLIAM J. LYNOTT

When it comes to properly managing your personal finances, the job is directly in your own hands. Your broker, banker or brother-in-law aren’t going to do it. It’s in your best interests to manage this yourself.

One of the most important parts of skilled financial management is periodically determining your true net worth. Last month, we talked about the importance of calculating your total assets, but that’s just the first step in determining your net worth.

Next, the job of calculating your debts and liabilities must be charged against those assets. Here is a reminder of the liabilities that you may have:

1 Credit card debt

If you pay your full balance when you get your credit card bills every month, congratulations are in order. However, if you are carrying a balance, that must be included among your debts. Don’t forget to add in any new purchases that have not yet been billed to your accounts.

2 Local charge accounts

If you have any local charge accounts with retailers, pharmacies or other businesses, the outstanding balances must be included as part of your total liabilities.

3 Outstanding loans

Until you list them on paper or a computer screen, you may not realize how fast they add up. In this category, include auto loans, home mortgages, student loans, home equity loans, home improvement loans, stock purchases on margin and remaining balances on any other outstanding loans.

4 Outstanding bills

Don’t forget those outstanding bills sitting in a drawer. This category includes unpaid medical and dental bills, homeowners insurance, life insurance, medical insurance, auto insurance and outstanding rent and utility bills.

5 Unpaid taxes

Among the easiest to forget when calculating total debts and liabilities are unpaid taxes. This includes not only federal and state income tax bills or estimates due, but also real estate and personal property taxes due in some states, as well as city and other local taxes.

Determine net worth

In summary, it’s important to include every financial obligation you have when adding total liabilities if your calculation of net worth is to be accurate and meaningful.

Once you are satisfied that you have included all your liabilities and all your assets, simply subtract your liabilities from your assets to determine your net worth.

Knowing exactly where you stand at a given time is essential. You may choose to calculate your net worth every month, once a year or at any point in between. No matter how often you choose to do it, it’s important to think of net worth as a snapshot of your financial status at a given point.

Like a photo snapshot, net worth is static; it portrays your financial status at a particular time. As with a photo, life goes on and so does your financial status. That’s why you should calculate your net worth on a periodic basis. OM

MR. LYNOTT IS A FREELANCE WRITER WHO SPECIALIZES IN BUSINESS MANAGEMNET AS WELL AS PERSONAL AND BUSINESS FINANCE. VISIT WWW.BLYNOTT.COM, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.