Understanding Net Worth

Your net worth is the difference between the totals of your assets and liabilities. In other words, if you sold all your assets for the values stated and paid off all your debts, the amount left over would be your net worth. Your net worth should not be thought of as cash to be spent. Rather, it is a measure of a person’s financial position as of the date of the personal balance sheet. Can your net worth be a negative number? Yes, this is possible. If you have more debt than total assets, you are technically insolvent. A continuation of this position may make it difficult for you to pay off all your debts on a timely basis, which could necessitate a declaration of bankruptcy.

Understanding Liabilities

Begin by listing your most current debts, such as utility bills, telephone bills, and
others.Next, list the balances outstanding on your credit card debts and loans. For most people, a home mortgage is their largest single debt outstanding.The amount to include is not the original amount of the loan but the current outstanding balance. The reason is because a part of the monthly payments made to the lender over the duration of the mortgage reduce the outstanding balance of the loan. The current outstanding balance of the loan may be obtained directly from the lender or from mortgage statements from the lender. You can also determine the balance yourself. See the financial calculator in section 20, which explains how to determine your mortgage balance. Add up all the amounts owed to others and you have the total of your liabilities.

Understanding Assets

Assets are arranged in order of liquidity; that is, the ability to convert them into cash without losing much in the conversion. The most liquid are at the top of the list and include cash, checking accounts, money market securities, and money market mutual funds.
Determining the value of your stocks, bonds, and mutual funds is easy. The prices can be found in the financial pages of a newspaper or obtained from brokerage and mutual fund statements.
Determining the current value of pension funds may be more difficult if the pension fund provides amounts of future income to be received. This means that for this type of plan, you would need to determine the present value of the plan. The human resources or benefits department of your company can provide this information.
If the cash surrender values of your whole life insurance policies and annuities are not shown on the latest statements you receive, call your insurance agent for this information.
Your home is likely to be your largest asset, so its value should not be overinflated or underinflated. The figure that you are looking for is the current market value; that is, what someone would be willing to pay for your house. Generally, the cost of the property is not particularly relevant if you have owned your house for a long period of time. The most recent selling prices of houses similar to yours in your area are a good indicator of the likely market value of your house. Real estate brokers can also provide you with an estimate of the value of your house.
The value of cars can be obtained from used car price guides such as the N.A.D.A. Official Used Car Guide and the Kelley Blue Book (www.kbb.com). These guides can be found in most public libraries, or you can obtain the price of your car from your bank, which should have copies of these guides. Household furniture, clothing, and personal effects should be more conservatively valued so as not to overstate their value. In an actual sale of these items, you might get far less than the estimated values. Add the estimates of the value of all the items that you own and you will have the total of your assets.

Advisory services

Most mutual fund investors are self-directed: They educate themselves through books like this one, personal finance magazines and TV programs, and brochures and prospectuses offered by the fund companies. Then they make their fund selections and monitor the growth of their investments in order to make sure that they perform as expected. One reason for the popularity of mutual funds is that they lend themselves to just this kind of do-it-yourself investing. However, the bigger fund companies do offer free, personalized advisory services to their higher-dollar clients — especially those with assets of $500,000 or more. Most people who give advice are Certified Financial Planners (look for the CFP designation after their names). Their expertise covers asset allocation approaches, investment strategies, and economic and business trends, and they’re qualified to give specific recommendations on funds to consider. They may also talk about the tax implications of your investment.
If you are not (yet) a part of this investment stratosphere, you may be able to gain some of the same advice from a broker, accountant, insurance agent, or other professional. Be sure you understand exactly how your advisor derives his compensation. An advisor who receives a fee directly from you for his services — either in the form of a straight payment or as a percentage of the assets you invest — is likely to give relatively unbiased advice (how knowledgeable or helpful this guidance proves to be is another matter). On the other hand, advisors who receive all or part of their payments in the form of sales commissions may recommend that you buy the investment products from which they stand to benefit personally. A stockbroker may urge you to invest in stocks; an insurance agent may direct you toward insurance company products such as annuities. Before you buy into any sales pitch, carefully consider the source and what he or she has to gain from your investment.

Retirement-related services

Many fund firms offer retirement planning services. You may be able to consult a staff member who is familiar with retirement planning issues by telephone, or you may have access to retirement-planning brochures, worksheets, and other literature through the mail or online.
Typically, the retirement topics covered include the following:

• How to calculate the amount of money you can expect to require for a comfortable and secure retirement
• How much you need to save and invest each month in order to reach your retirement goals
• How your asset allocation should change over time as your investment time horizon and risk tolerance change
• The pros and cons of various kinds of tax-advantaged retirement accounts: IRAs, Roth IRAs, 401(k)s, Keogh plans, and so on
• Options for taking distributions from your retirement account

Social Security plays a role in retirement planning for most Americans. Despite concerns over the long-term viability of the government funding for Social Security, most people can expect to derive at least part of their retirement income from this source.
Your Social Security income will be based largely on how much money you’ve earned (and paid Social Security taxes on) throughout your life. To determine how much you’re probably going to receive from the government after retirement, request Form SSA-7004, the Personal Earnings and Benefit Estimate Statement, from the Social Security Administration, by calling toll-free 1-800-772-1213 or by logging onto their Web site at www.ssa.gov.
When you receive the statement (in four to six weeks), you can develop some perspective on your expected monthly Social Security payments — and how much more retirement income you’ll need to provide through your own savings and investments.

Check-writing

If you own shares in a bond fund, such as a money market fund, you probably have the option of writing checks against the money in your account on special checks from the fund company. (Check-writing is normally not an option with a stock fund.)
Most funds establish a minimum amount for the checks you write (typically $500), and you may have a small per-check charge. Writing a check can be a convenient way of redeeming shares.
When you write a check against a mutual fund, whether to raise some cash or to pay a bill, you are redeeming shares of your investment. Thus, you may be realizing capital gains or other profits, which subjects you to a tax liability at the end of the year. Don’t forget this potential for taxable profit when the time comes to perform your tax calculations.

Automatic investment and reinvestment plans

Most fund families make it easy to set up an automatic investment plan, which is an excellent way for you to develop a consistent practice of saving. When you opt for automatic contributions to an investment account, you can also take advantage of the benefits of dollar cost averaging.
Ask your fund company for information about how to establish an automatic investment plan. You determine the amount that you want to designate — $100, $300, $1,000 — and the sum automatically comes out of your bank account each month and is invested in the fund of your choice. Plan to complete an application form and send in a (voided) check from your bank account.
You can also have the dividends and capital gains income from your funds automatically reinvested, buying you additional shares. I strongly recommend reinvesting, because it allows you to enjoy the benefits of compounding.
Most fund families will allow you to have your dividend and capital gains income reinvested in a different fund, which can be an easy way of diversifying your portfolio. Suppose Jacob has $5,000 invested in an index fund — a conservative, low-cost form of stock investment. He can arrange to have the dividends and capital gains from this fund invested in the fund family’s Aggressive Growth fund. As this amount gradually builds up, the growing investment gives Jacob the opportunity to participate in the profit potential of a more risky and volatile but often lucrative sector of the stock market — without taking any money out of his lower risk index fund investment.