The saying that you “can’t see for the forest for the trees” has a direct application to your net worth as you look at your financial picture. It is easy to get caught up in the nitty gritty of each deal, each investment, and each piece of the puzzle. Make time to zoom out and look at the big picture: what do you have and where do you want to be?
It is only when you step back that you can evaluate the overall health of your financial picture and maybe avoid some mistakes that people can make in building a healthy net worth.
Your net worth is not the same as your self-worth. The net worth formula is simple: Net Worth = Assets – Liabilities. Your net worth statement lists the items that make up your assets and liabilities. Rather than zooming back into the fine details, try focusing on the following key factors to understand how they impact the bigger picture.
Liquidity refers to the total amount of assets that are either cash or could be sold quickly and easily to raise cash. How much liquidity is “enough” depends on your individual circumstances. In general, your liquidity should be “sufficient” to cover debt and current and future living expenses, depending on your income streams. Your liquidity is an indication of how flexible you might choose to be with your finances. With more liquidity, you might decide to buy an illiquid investment, knowing that you have other sources of cash if needed.
To mangle a good Shakespeare quote: “Debt is neither good or bad, but it’s manner of use can make it so.” By moving from the details of your Cash Flow Management and Savings and Investment Planning (see earlier blogs) to the panorama of your overall debt on your net worth statement, you can begin to understand and make decisions based on how your use of debt is impacting your financial landscape.
Like the markets, everyone prefers a net worth that trends upward over time. Also like the market, unavoidable and uncontrollable events may cause short- and long-term retraction of your net worth. By having a plan and making sound financial decisions, you may be able to increase your probability of financial success. Is your net worth trending up? Why or why not? Talking to a financial planner can help clarify the picture.