Net worth is an important barometer of financial success for many investors. Your net worth shows how leveraged you are, how you are progressing toward your financial goals and how effectively you are retaining the wealth that you accumulate over the years. But net worth is a number created from many different underlying investments and can offer an insincere indication of how strong your financial foundation is. Depending on the assets that comprise your net worth, you might actually be on insecure financial footing no matter how big the number looks.
Defining Net Worth
Your net worth is the difference between your assets and your liabilities. In an ideal situation, your assets will be greater than your liabilities and will result in a strong net worth. A strong net worth shows that you are not over-leveraged and can act as a barometer toward your achievement of retirement and other financial goals. A low net worth can indicate a dangerous debt situation, financial goals that are in danger of not being achieved, and a shaky financial foundation for your family.
Net worth matters because it is a resource that can be tapped into if you need cash. Whether you need it to sustain your lifestyle, make repairs to your home or car, or to take a trip, your net worth is money that you have in reserve and that you can access when you need it.
The Assets behind Your Worth
Many people have the majority of their net worth in cash and investments that are easy to sell (or liquefy) such as mutual funds and stocks. But when you have a net worth that is mostly made up of real estate or other illiquid investments then your net worth is not as accessible as it should be. In addition, because the value of investments like real estate can shift up and down easily it leaves your net worth at risk of losing value just when you need it the most.
If your goal is to create a conservative and liquid net worth then you might consider adding Life insurance and annuities to your financial plan. Life insurance policies have cash values that can be drawn or borrowed from when you need to access cash.
Likewise, annuities offer a great place for your cash to grow, but are also easily liquidated should you need to access your cash sooner than anticipated.* In addition, they can provide a guaranteed income when you retire, unlike other retirement vehicles.
Remember, your net worth is only of value if it’s accessible, indicative of financial progress, and backed by assets such as Life insurance policies and annuities which increase in value over time or offer certain guarantees. Otherwise, it’s nothing but a number offering a false sense of security that might help you sleep at night but won’t keep a roof over your head.
*Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1/2, may be subject to a 10% federal income tax penalty