In part one we looked at your net worth again and reminded you of exactly what it was and how you came about it. We began to tell you of the dangers lurking in the shadows ready to eat into your net worth. We looked at how important it was to have a retirement plan regardless of how small it was, and how vital it was to save if you possibly could.

Job hopping was brought into the equation. Then bad debt inevitably came into the argument. We also told you how bad debt wasn’t necessarily a good or bad thing and that balance was the key here. So, if you’re sitting comfortably, then let’s take this on!

GOOD DEBT IS THE DEBT WE CAN’T LIVE WITHOUT IN THE MODERN WORLD LIKE A MORTGAGE! AND THERE ARE CLEVER WAYS TO DO IT BUT IN REAL TERMS BUYING A QUICKLY DEPRECIATING ASSET LIKE A CAR CAN BE CLASSED AS BAD DEBT! THIS IS BECAUSE YOU NEED OPERATIONAL SPENDING TO RUN IT – AND A MAINTENANCE BUDGET!

And Yet Most People Need a Car? You See Where the Balance Comes in?

As long as you don’t start and add a lot more bad debt to this then things will generally be fine. The car may even be used to make us money, so you have to be sensible here. For those people looking for a career or a good job, then the reality is this will always come at a price in any case!

After all, you can’t become a teacher, doctor or a lawyer without the right education. This also means student debt and extra educational costs. These are all part of life so the truth is we just have to manage them as sensibly as we possibly can, and we can’t do this without borrowing.

At the same time we need a roof over our heads so a mortgage is priceless for many. Yet again balance is the key word here – without this we are lost on the fiscal road for good! But as in life generally there are times when we must make important decisions or take these:

Open Ended Risks

By now it’s quite clear unplanned spending can cause us problems – in the longer term it can also destroy your net worth. What we are doing in the examples of the mortgage, the car and the student loans is clear. Taking open ended risks – hopefully carefully calculated but risks all the same.

You can’t take risks in life as by its very essence this is what life brings with it. What you can do is minimize the number of open ended risks you take – so let’s take a closer view of this!

We should remember medical costs are largely responsible for the majority of bankruptcy cases in America. Even youngsters can be afflicted by unseen injury and illness and of course this has to be paid for.

Not having medical insurance then is seem as an open ended risk – you’re just gambling you won’t need anyway fingers crossed, but of course you can’t be certain of this! Likewise if we try and avoid homeowner’s insurance we are taking an open ended risk on our home. If you live in a possible storm endangered area this can be a huge mistake. And of course if these gambles go wrong then our net worth is affected!

So the Upshot?

Well this is quite straightforward – it takes time and huge effort to build up your net worth – but if we aren’t careful then it can be quickly knocked down again. Yes we have to take open ended risks but we must do all we can to ensure our net worth remains in good health. This is all about balance and looking at both the advantages and disadvantages of the choices we make financially. You owe it to yourself to get this right!

You may well have read our previous articles explaining the finer points of net worth. And hey……..this is the complete sum of your personal worth so it’s very important. We’ve seen how to build up your net worth by earning more, saving and even investing. But once you get into a really good position it’s easy to knock the castle down.

These next articles then, will look at how not to destroy your net worth. We care about you, so please take heed of the warnings about to come your way. And let’s begin by reminding you of the basics?

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Big Spending Can Wreak Havoc!

Remember your net worth has accumulated simply because you ended up making more money and saving as opposed to the money spent on your liabilities. If the first is greater than the second then of course you have a positive net worth.

 

By the same token you can easily work out if the opposite happens and you spend more than you earn, and dip into savings then your net worth will slide away into the sunset! This might happen because you suddenly start to borrow big on clothes, furnishing, vehicles or credit cards. If your budget remains firm and disciplined then this problem simply won’t arise.

So the lesson here is if you start spending suddenly above your limit then it won’t take long to do long term damage to your financial health! Don’t do it! Don’t spend top money on things you really don’t need or want!

THERE IS ONE BABY MANY PEOPLE DON’T THINK ABOUT AND YET THIS CAN HAVE THE GREATEST CONSEQUENCES ON YOUR NET WORTH?

Failure to Make the Most of Your Peak Earning Power!

Oh yes……don’t think we haven’t thought of everything here! Unless as an individual you’re very lucky to be a twenty something entertainer, rock star or professional sportsman or woman, then the chances are you won’t be making big money at this stage. You can’t generalise of course, but people tend to hit the peak earning area in their early 40’s and go on to maximise this until their mid 50’s.

This is because quite a lot of twenty something’s could still be in education especially at the lower end. And let’s be honest? Top earnings arrive with experience and a senior position at work or otherwise. It makes sense right? So there’s one thing you should avoid if you can and that’s: ‘Job Hopping’.

If you change your job frequently or profession for that matter, then this will make it hard for you to maximise earnings. Sometimes for various reasons it can’t be helped of course, but the best way to peak well, is to stay in the same career or choose your jobs very carefully. All of this can have a big impact on your net worth.

Here’s Some Top Advice: If You Have No Retirement Plan in Place Or for That Matter Any Savings, Then Net Worth Simply Won’t Exist!

You simply must accumulate your savings but at the same time keep you spending lower than your earnings.

But crucially you really need to have some sort of a retirement plan. If you don’t then it’s easy for this money to be spend each month. This also means the danger of going over your limits.

The fact is with no investments or savings you can seriously hold back or even erase the net worth process big time! But of course there’s one thing that really erode at your net worth over time.

Bad Debt!

Should be a simple concept on the face of things but we don’t always completely understand what debt is? You must remember not all debt is either a thing or a bad thing, and not all of this debt is equal. Some debt we simply need to have – some debt we don’t need to have.

It’s all about balance. Yes be in little doubt debt can be a big threat to your total net worth and your financial standing in the future, so the watchword has to be control! Even if you just start out with small amounts of debt on a credit card for example, this can quite quickly get out of control because of the high interest rates involved.

In part 2 we’ll look more at this and give more advice on just how to stop your net worth crumbling.

The problem is that for many increases in assets there is a commensurate increase in liabilities (eg. buying a house usually requires a mortgage). Additionally, people only make so much money at their jobs, and negotiating a raise may be difficult.

This creates a necessary limit on asset creation as spending beyond your ability to pay will accrue debt. This does not mean that someone should never buy a house or only buy a house with cash reserves, instead it is meant to illustrate the interconnected nature of assets and liabilities.

Ideally, one should pursue a strategy that allows for the beneficial movement of both assets and liabilities simultaneously. A good example of this would be investing in a 401(k).

Making Small Changes

This defers your tax-liability and increases your asset holdings. The difficulty faced by most people is that they do not have the residual income necessary to adequately increase their assets beyond their liabilities. Therefore, the most appropriate measure to undertake in order to increase net worth is to examine your spending habits or your cash outflows. Finding a new, better paying job, is not as easy as deciding to forgo dining out one day a week.

Note how you are spending money (your liabilities) and identify ways of reducing that burden. By reducing the amount needed to service debt, you increase the amount of money available to go into asset creation. Remember, decreasing liabilities is not simply about decreasing your debt payments; it is about managing your overall spending.

Decide not to buy the latest smartphone or turn off lights when you are not in a room. Small changes in behaviour can go a long way toward reducing your expenses. The bonus is that by trimming back on what you can and growing your assets, you can create more value that can be borrowed against in the future thus allowing you to increase your assets at the expense of your liabilities.

The Bottom Line

Taking the time to look into your household’s net worth can tell you many things and it really is a balancing act. Incurring a liability is not necessarily a bad thing if it means getting a new car when the old one breaks down or an education to improve job prospects.

The important thing is that we adequately and appropriately budget for these items and ensure that they add value over the long term. A new car to replace a dangerous clunker is a “good” purchase whereas buying a new convertible due to a mid-life crisis is less so.

Assets and liabilities play off of one another, improving your position in one allows you to make gains in the other. How you do this really comes down to your own personal spending habits and how quickly you want to be able to enact change to improve your financial health.

It may sound complicated but the resounding answer my friends is yes! But how do you go about the process? Well first let’s look at the detail. Public companies are required to produce reports based on their financial positions.

The fact is, you’ve already heard of this! Income statements, balance sheets, cash flow statements are all in effect the very same thing! They all paint a picture of how a firm is performing financially. Now you may not be a Bill Gates or indeed have a business at all, but the point we are making is, individuals can do exactly the same thing themselves, to outline their position fiscally! It’s called working out your net worth.

Now if you’re not a mathematician or a business expert don’t worry. Once you understand where this formula comes from everything will fall into place!

ADD UP ALL YOUR ASSETS AND THEN SUBTRACT YOUR LIABILITIES – THIS WILL GIVE YOU YOUR NET WORTH!

The natural reaction to all of this is, how can I improve my net worth? In truth it’s not really a complicated process and anyone can do it quite quickly. But in order to simplify this lets tell you about the key words here and what they mean in real terms. Once you have this basic grounding then everything else becomes much easier when dealing with your net worth!

	An asset This is anything you possess carrying a cash value. It could even be loose change in your pocket or purse. Cars, boats, bikes, bank accounts, absolutely anything with a cash value. Assets are important to you on a day to day basis and the more you have the better your financial standing. Companies look at assets in exactly the same way so the theory works for everyone.
	Market value Basically this is another term for the cash value of all your assets – this liquidation value is about real hard money in real time. Imagine what you might get if you sold all of your assets tomorrow? You are working on their overall market value!
	Net Worth When we talk about net worth we talk about how much the item would be worth today if you sold it. Individuals sometimes make the mistake of putting extra value on things because they have sentimental feelings attached to them. An asset is only worth what people are willing to pay for it at any specific time. It’s important to include your wage and other income yielded from any investments you may have.
	Liabilities These are straightforward to explain and basically amount to the money you owe others. Things like student loans, car payments, credit card debt, Gas and electric bills and of course your mortgage are all liabilities. It’s really a technical term for the debt any individual carries with them, but it’s vital in calculating net worth as you’ll find out in part two.

ANY ASSETS YOU HAVE ARE KNOWN AS ‘CASH INFLOWS’ – ANY LIABILITIES YOU HAVE ARE KNOWN AS ‘CASH OUTFLOWS’

So in part two we’ll look at increasing your net worth and what’s involved – we can go into the whole process in slightly more detail. We can then sum everything up for you and give more advice on the topic so you fully understand how things work!

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