Net worth can be positive or negative. Negative net worth is not necessarily bad. Many families begin their adult lives with negative net worth. Conversely, positive net worth does not necessarily mean that the family is “set” and finished planning. The calculation of net worth and establishment of goals provides us with the framework with which to develop our plan. A variety of tools can be used in developing the plan.
As time passes, comparing current and past net worth statements will reveal a trend. This is what matters. Is net worth increasing or decreasing? If decreasing, more drastic changes should be made. If increasing, is it surpassing, meeting or falling short of the established goal? These are important questions in assessing your progress.
If progress is meeting or surpassing objectives, continue with the current plan or look into ways of further improving. You may even consider raising your goal. If in developing your plan you’ve made sacrifices in certain areas of your life and are currently uncomfortable in some way, consider giving back to those areas to regain balance. What you do with your excess will depend on your needs and priorities. If you are on target, it is important to reward yourself and your family and enjoy your success.
If progress falls short of your goal, there are two possible courses of action. The first is to revise your plan. Maybe debt can be decreased or current income and investment returns can be increased. The other is to revise your goal and establish something more attainable, more realistic. Often, some combination of the two will be utilized.
It is important to develop your plan so that is effective enough to achieve your goals, but realistic enough to be achievable. This may require the adjustment of many factors including income, spending priorities (i.e. shift more capital towards paying down debt) and even adjustment of the goal itself.
This process may involve trial and error. The key is to be brutally honest with yourself about your needs and what you’re able to sacrifice when developing and revising your plan. Remember that what you’re able to give up isn’t always the same thing as what you’re willing to give up. Do not lower goals to make things easier.
Though not as common, also keep in mind that you may not have to give anything up at all. It all depends on what you goals are, how much time you have to get there and what your current financial situation is. If you’re already on your way, the process may involve relatively few changes or even allow you more discretionary income if your current saving habits are excessive. This is a “problem” most of us wouldn’t mind having. Given the nature of society however, this is rarely the case.
Once a plan is developed, implementation is fairly straightforward. Some plans are easier to implement than others. The good thing about developing the plan yourself is that it’s fairly simple to implement yourself as well. You’ve probably learned more about your financial position during this process than you realize.