What To Know About Measuring Your Total Wealth

By Gnifrus Urquart

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.

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.

Current income and job status are two considerations when calculating wealth building potential. Income impacts cash inflow and job status the stability of that income. A high salary is certainly a benefit, but in terms of long term financial security, job stability, long-term growth and enjoyment must be considered.

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.

Another component is housing. Owning a home is a means of building wealth, however with today’s real estate market a home worth less than the purchase price can be an anchor. Renting could be more economically beneficial for some.

A cornerstone of wealth today is credit. This goes beyond a mere credit score, although a strong score is important. The key in wealth measurement is also consideration of the trend of one’s credit. An above average score that has declined may not be as positive as an average score that is rising 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 and family status as indicators of wealth relate to potential savings growth and long-term expenses. Younger people have a longer time before retirement in order to let savings grow. Those with large, young families will likely have significant expenses in housing and education to contend with, all of which affect long-term financial well-being.

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.

There are many factors that go into understanding one’s long term financial prospects. Net worth is being supplanted by the more holistic total wealth calculation. Measuring your total wealth will not only provide one with a more accurate portrait of finances, but can also uncover areas that may need more attention.

An SMSF or self managed super fund is a method of ensuring that you are in control of your personal financial program. Understanding the intricacies of self managed super admin of funds keeps you aware of the decisions you make.

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Topics: Wealth Building | Comments Off

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