One of our favorite moments is being able to show our clients their Net Worth Statement. Regardless of whether their Net Worth is $800,000 or $20 million, the reaction is always the same. The remarks are “I can’t believe it” or “It certainly doesn’t feel that way all the time.”
Now, why is that?
For one, it is often difficult to figure out what that number is. This is especially true if you have a multitude of accounts at different places (e.g. retirement accounts from past employers, old savings accounts, etc.) or many different types of assets that are hard to value (e.g. real estate, a business, stock options, etc.). In helping our clients organize their finances, oftentimes this is their first time seeing a definitive number and knowing that it’s an accurate, holistic view of all their finances.
Secondly, no matter what your Net Worth is, oftentimes people still cannot kick the feeling that they might be spending too much. We call this the ‘being asset rich, but feeling cash flow poor’ effect. It’s a bizarre paradox that many people experience every day. For many, the feeling is derived from much of their money being tied up in relatively illiquid assets, such as real estate or their business. For others it stems from having lots of future income-producing assets that they don’t have access to quite yet, such as pensions, their 401(k) plans, Individual Retirement Accounts (IRAs), or Social Security benefits.
The best way to combat these two issues is to truly buckle down and take order of your finances:
- List out all of your assets and liabilities. When organizing your assets, don’t forget those old, forgotten accounts with past employers or financial institutions. Remember to include the value of any real estate or vehicles. Also be sure to include the cash surrender value of any life insurance. When it comes to liabilities, this encompasses any mortgages, car loans, and business or personal loans you might have. This first time around, there is nothing wrong with simply guessing the value of each asset or liability. When you calculate your estimated Net Worth by subtracting total liabilities from your total assets, it will incentivize you to figure out the true value of each item so you can continue to refine the number.
- Take time to complete a budget. This certainly isn’t everyone’s favorite exercise, but it’s a great way to become more aware of where all your money is going. In fact, this is the best remedy for fighting that “Am I spending too much?” complex. The point of this process isn’t necessarily to force you into building and tracking a monthly budget, but rather to simply figure out how much you’re truly spending overall. This creates an understanding of what is left over in savings to direct toward your savings or investment accounts.
- Work with a professional to complete a holistic financial plan. Completing a Net Worth Statement and budget is all part of the financial planning process, and you’ll have a third-party there to hold you accountable to getting organized. Your financial plan will then dictate your goals and project your probability of achieving those goals. This way, any uncertainty or concerns can subside so you finally feel fully in control of your finances.