October 2006

One Kansas City couple celebrates New Year’s Day by figuring their net worth and toasting their financial success.

But there’s more to your net worth statement than the bottom line.

“Of course your personal financial statement tells you how much wealth you’ve accumulated,” says Abel Ortega, private banker with Northern Trust. “But if you’ll ask a few questions, your net worth statement can also help you identify ways to become more fiscally fit.”

Here’s what to look for in your net worth statement:

1. Am I liquid?
The first thing your net worth statement tells you is whether you’re adequately “liquid”—that is, whether you have enough easily accessible assets to see you through an emergency. How can you tell?

“Ask yourself, ‘If our family’s primary breadwinner had a health problem and couldn’t work, what resources would we tap to cover expenses for three to six months?’” Ortega suggests.

But don’t confuse liquidity with cash. Liquid assets are anything that can be sold in 30 days or less, Ortega says. That includes the contents of your checking account, of course, but also mutual fund shares, CDs and maturing T-bills, for instance.

What makes 30 days the magic number? That’s when your first round of bills would be due.

2. Are my assets in balance?
The next thing to check is whether your portfolio remains well balanced. To check, compare your actual portfolio to the asset allocation your financial planner recommended.

True diversification, of course, means more than just owning stocks, bonds and cash. It also means spreading your investment dollars within these broad asset classes.

Two specific things to check:

Are you too house heavy? As housing values have increased, many Americans themselves overallocated in real estate. Ortega’s advice: Double-check your other investments to make sure they balance your real estate allocation.

Also, if you find that your house accounts for most of your net worth, you might want to reconsider those additional home investment projects, like the new Olympic-sized swimming pool.

Are you maxing out your tax-deferred savings? Make sure you’re making the most of your 401(k) plan and other vehicles for reducing your tax burden.

3. Is your money working for you?
You’re working for some of your assets. Some of your assets are working for you.

Non-working assets are the gross value (that means you don’t subtract what you owe on them) of your house, cars, 72-inch flat screen TV and other toys.

You’re working to pay for these assets.

Working assets are the sum of your stocks, bonds, cash and other investments. They’re growing to take care of your children’s educations, your retirement and your other future needs.

In other words, they’re working for you.

Because your working assets are the ones that will take care of you and your loved ones in the future, aim for a ratio of 75 percent working assets to 25 percent non-working ones.

To figure out your ratio of working assets to non-working ones:

• Total the value of all your assets.
• Divide your working assets by your total assets
• Divide your non-working assets by your total assets

Knowing your ratio can help you make better financial decisions. Paying off your mortgage, for example, doesn’t improve your working capital ratio, so all things else being equal, that might not be your best financial move.

4. What’s your personal score?
Finally, figure out how much your net worth has increased since the last time you measured it.

“It can be motivating to keep score,” Ortega says.

The bottom line on your bottom line
Calculate your net worth once a year—more often if you have a major life change like sending a child to college, selling your house or retiring.

Figuring your personal financial statement can help you track how well you’re doing and identify ways to improve your financial state.

“If you don’t measure it,” Ortega says, “you can’t manage it.”

How much is your house really worth?
As with any asset sold on the open market, your house is worth whatever you can get somebody to pay for it on the day you're ready to sell.

But for a quick—and free—fix on your home's value, check with your local taxing authority, suggests Abel Ortega, private banker with Northern Trust. Find out what value it's placed on your home, then add 10 percent.

How are Americans doing?
Not so well, according to the latest statistics

The average American family isn't accumulating much wealth: Median net worth rose just 1.5 percent between 2001 and 2004, according to the Federal Reserve Board's Survey of Consumer Finances. The median family's bottom line: $93,100.

Perhaps that's because they're living beyio=ond theor means: The nation's perosnal-saving rate—that's income minus consumption and interest payments—turned megative in April 2005 for the first time since 1933, according to the Bureau of Economic Analysis.

But more families own stock: Nearly half of all families had money in the market in 2004, up from just 19 percent in 1983.

Source: Ad Age

How hard are your assets working?

Figure your net worth
To figure your net worth:

• Tally your assets. Assets are the things you own, from your stocks to the family silver to your summer home.
   
• Tally your liabilities. Liabilities are the things you owe, from your mortgage to your car loan.
   
• Subtract your liabilities from your assets. The remainder is your net worth.

For an interactive worksheet to help you calculate your bottom line, visit What's Your Net Worth?.