Everyone should have an understanding of where they stand financially. Unfortunately, one of the most common measures, net worth often does not yield an accurate portrayal of an individual's financial standing. More and more people are taking the time to calculate their total wealth, which is a more holistic approach to wealth measurement. Measuring your total wealth not only provides a more accurate picture, but can also help diagnose potential financial issues.
Most are familiar with a net worth calculation; take assets such as one's home, savings, investments and other valuables and deduct liabilities such as mortgages, loans and credit card debt. The resulting number is net worth. For the majority of individuals (especially younger people) the result is not very heartening. On the other hand there are other measurements that take into account more salient factors that contribute to financial health long term.
Two factors that are included in a total wealth calculation are income and job stability and status. Current income is a key measure as it accounts for cash inflow. This is essential as having a strong net worth with little or no income could be a signal of a long-term issue. Job status is also important to consider as it helps predict the stability of income and prospects over the long haul.
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.
Also consider housing. Home ownership was once a major part of wealth building. In today's environment many home owners find themselves upside down with regard to home value, potentially dragging down long term wealth building prospects.
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.
One's current personal status and situation should also be considered. Attributes such as age, where one resides, family composition and physical health all impact overall financial outlook.
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.
Most are familiar with a net worth calculation; take assets such as one's home, savings, investments and other valuables and deduct liabilities such as mortgages, loans and credit card debt. The resulting number is net worth. For the majority of individuals (especially younger people) the result is not very heartening. On the other hand there are other measurements that take into account more salient factors that contribute to financial health long term.
Two factors that are included in a total wealth calculation are income and job stability and status. Current income is a key measure as it accounts for cash inflow. This is essential as having a strong net worth with little or no income could be a signal of a long-term issue. Job status is also important to consider as it helps predict the stability of income and prospects over the long haul.
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.
Also consider housing. Home ownership was once a major part of wealth building. In today's environment many home owners find themselves upside down with regard to home value, potentially dragging down long term wealth building prospects.
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.
One's current personal status and situation should also be considered. Attributes such as age, where one resides, family composition and physical health all impact overall financial outlook.
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 method of being certain that you are in charge of your individual financial program. Understanding the intricacies of self managed super admin of funds keeps you aware of the decisions you make.
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