Most people have no idea what they are worth financially and even less idea how to measure their finances. Many have heard of the term net worth, but this is little more than a calculation of cash versus liabilities; great for a company, but not helpful for an individual. Total wealth is a relatively new term that lets one know how financially stable they are. Measuring your total wealth gives one a real picture of financial health.
The traditional net worth calculation takes assets versus liabilities to develop a measure of an individual's financial worth. Assets include home, automobiles, savings, investments and the like). Liabilities include mortgages, credit card debt, auto, personal or student loan balances). A total wealth measure takes into account other crucial elements and provides a much more accurate financial picture.
For example, current income and the status of one's employment are crucial components of financial health, but not taken into consideration in net worth calculation. A high-salary and good prospect for job stability both contribute positively in a total wealth measure. Other employment factors like job satisfaction and growth potential are also incorporated.
Another important measurement is related to savings and return on those savings. A key component to long-term financial security is one's personal savings rate. In other words, how much of income is saved, not spent. This is another area in which a simple net worth calculation can be misleading. A negative savings rate slowly erodes worth. The related measure, rate of return (known as ROR) indicates how money is working to build wealth. Money in a mattress collects no interest. Those with a strong total wealth let their money work to increase overall net worth.
Housing is another key consideration. In today's market, owning a home may mean one owes more than the home is worth. This can be a drag on wealth and in some cases, renting could have greater financial benefit.
Credit worthiness is a main component of financial health in today's economy. However in the case of total wealth measurement, a simple credit score doesn't always show the total picture. The key is trajectory of credit score. In the case where past mistakes have done damage, it is important that steps are being taken to raise one's credit score over time.
Personal circumstances play a major role in calculating wealth building potential. No financial situation can be accurate without taking into account things like age, family composition, locale and even physical health.
Age is crucial to understanding total wealth. The older the individual, the less time one's money has to grow. This also impacts the age in which someone can comfortably retire. Family composition mainly affects expenses, both short and long term. Short term items like housing and food costs are costlier with a large family, while education can be a significant long term cost.
Living location as it relates to total wealth is critical to calculations of long term wealth building. In terms of a total wealth calculation, someone with a moderate salary, but living in a lower cost of living region will likely have the advantage.
So be sure to look beyond net worth and do some further research on measuring your total wealth. This alternative score will provide a more realistic picture of current and future financial health.
The traditional net worth calculation takes assets versus liabilities to develop a measure of an individual's financial worth. Assets include home, automobiles, savings, investments and the like). Liabilities include mortgages, credit card debt, auto, personal or student loan balances). A total wealth measure takes into account other crucial elements and provides a much more accurate financial picture.
For example, current income and the status of one's employment are crucial components of financial health, but not taken into consideration in net worth calculation. A high-salary and good prospect for job stability both contribute positively in a total wealth measure. Other employment factors like job satisfaction and growth potential are also incorporated.
Another important measurement is related to savings and return on those savings. A key component to long-term financial security is one's personal savings rate. In other words, how much of income is saved, not spent. This is another area in which a simple net worth calculation can be misleading. A negative savings rate slowly erodes worth. The related measure, rate of return (known as ROR) indicates how money is working to build wealth. Money in a mattress collects no interest. Those with a strong total wealth let their money work to increase overall net worth.
Housing is another key consideration. In today's market, owning a home may mean one owes more than the home is worth. This can be a drag on wealth and in some cases, renting could have greater financial benefit.
Credit worthiness is a main component of financial health in today's economy. However in the case of total wealth measurement, a simple credit score doesn't always show the total picture. The key is trajectory of credit score. In the case where past mistakes have done damage, it is important that steps are being taken to raise one's credit score over time.
Personal circumstances play a major role in calculating wealth building potential. No financial situation can be accurate without taking into account things like age, family composition, locale and even physical health.
Age is crucial to understanding total wealth. The older the individual, the less time one's money has to grow. This also impacts the age in which someone can comfortably retire. Family composition mainly affects expenses, both short and long term. Short term items like housing and food costs are costlier with a large family, while education can be a significant long term cost.
Living location as it relates to total wealth is critical to calculations of long term wealth building. In terms of a total wealth calculation, someone with a moderate salary, but living in a lower cost of living region will likely have the advantage.
So be sure to look beyond net worth and do some further research on measuring your total wealth. This alternative score will provide a more realistic picture of current and future financial health.
About the Author:
An SMSF or self managed super fund is one way of ensuring that you are in charge of your personal financial program. Understanding the details of self managed super admin of funds keeps you aware of the decisions you make.
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