Net worth is determined by subtracting your liabilities from your assets. The product is a real assessment of your current financial situation. Net worth and cash flow are the cumulative result of all financial decisions that we make. The net worth calculation provides a wealth of information that can be used to establish goals and develop a planning strategy. Below is an overview of the planning process.
1. Calculating Your Net Worth
This can be done using a variety of free tools. No matter what tool you use, it must essentially consist of the same basic principle, subtracting your liabilities from your assets.
2. Setting Goals
After calculating your net worth and deriving an understanding financial situation you can begin to develop goals. A simple example of a goal set up would be to set a net worth goal for one year from now and reset that goal annually. Though technically these annual goals can be thought of as objectives in achieving your overarching goal because of their measurability, I still prefer to call them goals. Annual goals should be large enough to ensure progress towards your overarching goal, but realistic enough to be attainable.
3. Development and Implementation of Plan
After establishing goals it is critical to develop an effective plan for achieving that goal. This will include the establishment of objectives and the utilization of certain tools such as developing a budget, establishing a savings plan and managing cash flow. Once developed, implement your plan as soon as practical.
4. Monitoring and Reviewing of Plan
After developing and implementing your plan it is essential to follow through and monitor progress. Things change and sometimes adjustments will have to be made.
