Featured Posts, Investing, Personal Finance

What Is Your Net Worth?

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How many times have you googled Net worth of *insert celebrity name* ?? I know I’ve done this quite a few times. We often hear people mention the term, but do you know how to calculate your net worth? If not, let’s sip some latté and break this thing down…

Quick Accounting 101 Lesson:

Assets are anything owned of use or value that can be converted into cash. Assets include cash, investments, land, building, equipment, etc. On the other side, we have liabilities. A liability is money owed; an obligation against an asset.

Your net worth is basically everything that you own minus everything that you owe. If you sold all your assets and paid off all debts, how much money would you have left over? Consider this your financial report card. It’s a reflection of your financial health. Calculating your net worth should be one of the first steps to achieving your financial goals. You can’t plot a financial goal map if you don’t know where you currently stand. 

How To Calculate Net Worth:

List all assets and the estimated value.

  • Checking and savings account balance
  • Brokerage/Investment accounts
  • Estimated house/vehicle value
  • Jewelry and collectibles

List all debt.

  • Credit card debt
  • Mortgage balance
  • Car loan balance
  • Medical bills owed
  • Student loans

Subtract your total debt from your total assets. You have now calculated your net worth!!!

Net Worth Analysis:

Okay, so you’ve calculated your net worth. If your assets exceed your liabilities, then you have a positive net worth. Now, if your assets do not exceed your liabilities, then you have a negative net worth. If you calculated a negative net worth, don’t worry. A negative net worth is common for young millennials. This is often due to high student loan debt. This means that you have not earned enough money to offset the debt that you currently owe. The goal is to focus on increasing your net worth. In order to increase net worth, you should increase assets and/or decrease liabilities – paying down debt, building equity in your home, purchasing more investments (stocks, bonds), etc.

There is no standard when it comes to net worth expectations. Every individual has different financial needs and based on his/her lifestyle will have different financial goals. A formula that is often used as a benchmark when it comes to determining your “target” net worth is:

Net Worth = (Your age – 25) × (Gross Annual Income ÷ 5)

Regardless of where you currently stand financially, it is very important to know and understand your net worth. Understanding where your money is going will hopefully help you make better financial decisions, especially when deciding between if something is a need versus a want. Whether you are using an excel file or your favorite finance app, tracking your finances is key. If you need a recommendation, head over to Mint. It’s a free tool, that makes tracking your money easy for all levels.

 

Featured Posts, Investing

What Type of Investor Are You?

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So, you’re ready to start investing… but first, what is your risk tolerance level? WHAT TYPE OF INVESTOR ARE YOU? Understanding your risk tolerance level is one of the most important factors in investing. This will shape your investment strategy and become a guide to building your portfolio. Risk tolerance is the level of risk you are willing to accept. We all get excited about the gains, but can you handle the losses? The three risk tolerance/investor types:

A conservative investor is all about protecting his/her principal (original investment) by minimizing risk. This investor “plays it safe”, similar to the granny who likes to stuff her savings in her mattress as opposed to trusting the bank. A conservative investor is okay with smaller gains between 0-5% because they are taking a smaller level of risk. These investors have likely already built their portfolio to ensure a comfortable and steady income stream or they are just scared to lose money. A conservative investor has a portfolio comprised of:

  • Regular bank savings account
  • Certificate of deposit (CDs)
  • Government bonds (municipal, treasury, etc.)
  • Annuities

A moderate investor focuses on diversifying his/her portfolio in a way that limits risk while pursuing stronger returns. Think of this as a hybrid between conservative and aggressive. A moderate investor may have an expectation of between 5-20% annual return. Moderate is typically the most recommended portfolio for most investors:

  • Equities (focusing on diversification)
  • Mutual funds
  • Exchange-traded Funds (ETFs)
  • Individual bonds

An aggressive investor understands “the greater the risk, the greater the return”… similar to that one uncle willing to risk it all at the casino to triple his paycheck. These investors are able to handle the unpredictable shifts that Wall Street brings. By accepting less diversification in comparison to moderate, this investor is susceptible to far greater levels of risk. An aggressive investor typically looks for returns greater than 20%. This investor’s portfolio could oftentimes include:

  • Equities (individual stocks)
  • Cryptocurrencies (Note: though there have been many success stories, be careful with cryptocurrencies as these are not regulated).
  • Options and other special contracts

Though some portfolios may include the same type of investments (bonds, stocks, etc), they are weighed differently depending upon your investment strategy. Overall, it is typically advised to be more aggressive in your earlier stages of life. The closer an investor gets to the age of retirement, the more conservative the investor should become. Regardless of your investment type, investing in the stock market is a good strategy to provide long-term wealth. Once you have an understanding of what category you may fall under, consult a financial advisor on ways to incorporate your preferred strategy into your respective financial plans.

Investing

A Million Ways to Get It… CHOOSE ONE!

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Sorry Jay-z!! If there are a million ways to get it, then why just choose one?! I’m thinking two, three, four…

Statistics show that millionaires have an average of seven sources of income. (I’m sure Jay-z has more than that). Hence the saying, “the rich get richer” because the more you have the more you’ll get.

There are two types of income:

Active income: refers to income received from performing a service. This includes wages, tips, salaries, commissions and income from businesses in which there is a material participation.

Passive income: earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved.

There is often this misconception that passive income requires absolutely no work at all; however, there is some work involved in the creation stage. However, the income is not tied to work hours.

For the average American, we start with active income. The “day job/9 to 5” that we use as an investment tool to fund our side hustles until they are running on their own. There are only 24 hours in a day so the ideal goal is to maximize your streams of passive income.

Common types of passive income:

  1. Interest – from a variety of loans, either to individuals or companies
  2. Dividends – from investments or partnerships
  3. Capital gains – from the sale of investments
  4. Royalties – from products you sell or licenses
  5. Rental income – from real estate investments
  6. Publishing an e-book or online course
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