Morning Star Amy Arnott
An overview of all assets and liabilities is an important first step towards better handling your finances. Before you start putting together your net worth spreadsheet, gather as much information as possible and get the best sense of what it can convey to you.
Overall net assets (excluding assets and liabilities)
The ultimate insight from the net worth statement is exactly what it says. Net Asset Number, this is simply the asset minus the liability. Although we don’t know much about the number of individuals, it’s a benchmark that will help you track it over time. The negative net worth figure clearly shows room for improvement.
Debt ratio
To calculate your debt rate, you must add all the monthly debt payments you need, including mortgage payments, student loans, car loans, credit card debts, and more. Next, take the total and split it by monthly total (pre-tax) income. The lower this number is better, with any number above 43% of its ability to cause problems with getting or refinancing a mortgage.
Emergency Fund
Most financial advisors recommend maintaining monthly living expenses for at least 3-6 months with cash or other low-risk, highly liquid assets. Some investors may want to bring 12 months of expenses closer to cash when variable pay is a significant portion of the total pay.
Splitting assets between partners
This question usually arises in the context of a divorce, but it is also worth considering for couples who plan to continue marrying. Depending on state real estate tax restrictions and potential future changes to federal real estate tax laws, it is beneficial for couples to try to balance the assets each individual owns. It is also important that each member of the couple has their own retirement assets.
Asset allocation in taxable, tax deferred, and real estate holdings
There is no particular reason why each allocation should be exactly one-third, but the principle of fair distribution helps avoid assets that are out of balance in a particular region. It is wise to avoid excessively large concentration on residential real estate, especially since it is not liquid. Investors generally need to direct the majority of their savings towards tax-deferred retirement accounts, but once they accumulate a healthy balance, it makes sense to direct their savings to tax accounts.
Single Company Risk
If one stock is a large part of your net worth, that may be the source of concern. This is especially true for employer stocks. Because it means that your human capital (the ability to generate income and make a living) and financial capital both depend on the fate of one company.
Fluidity and assessment issues
For most assets, valuation is easy. But things can be a little more difficult for non-liquid collectibles, such as bone seques items and baseball cards. For physical assets, make sure all of these assets are safely stored and itemized in the homeowner’s insurance contract.
Number of accounts
Life is complicated enough without having many financial accounts scattered across different institutions. If you don’t change jobs and move assets from your previous employer’s plans or set up different IRAs at different times, it’s easy to accumulate multiple accounts. However, the hassle of tracking your account number, password, and updated account balances can be worthless. This is especially true for investors who approach 72 when the minimum required distribution begins.
Investors do not need to obtain RMDs from each account, but they must base their withdrawals on the total accounts for all covered accounts. Having a limited number of accounts to deal with makes things easier for your family when you die or become incompetent.
This article was provided to the Associated Press by Morningstar. For more personal financial content, visit https://www.morningstar.com/personal-finance
Amy Arnott is a portfolio strategist for Morningstar.
