Up Your Assets!
By: Amy Irvine, CFP®, EA, MPAS®, CCFC
Although we are a full month into 2021, I’ve heard so many people say, “it feels like an extension of 2020.” I’ve joked that 2020 was the year of Flip Flops, Crocs, and Slippers (the number of times I put on dress shoes could be counted on one hand), and it does seem that this trend is continuing thus far. What does this have to do with finance? Well nothing actually, but it seemed like a distracting lead into talking about comparing year-over-year net worth and important financial ratios.
Whenever I write or talk to people about their increasing net worth, I always think about when I was in college, and I belonged to an accounting club (yes, I was a little geeky). We were doing some fundraising and the sweatshirts we were selling had the name of the accounting club on the front and the tagline, “Up Your Assets.” For an 18-year-old, that was so cheeky! Well, here we are 31 years later and I’m being a little cheeky again. I just thought it was so fitting for the theme of this month, which is to understand your net worth and important financial ratios.
But before we dig into that, let me first share a few economic and market thoughts with you, since so many have asked my opinion about the outlook for 2021. We believe that 2021 is going to be a challenging year for both the stock market and the economy, but remember, the stock market is often a leading indicator of the economy and the two don’t always lock step together. However, the key indicators that we will be looking at include jobs, interest rates, and policy. Clearly, the areas that continue to suffer the most are the service-related sectors and until restrictions are lifted, we believe job numbers will waiver; so, one could conclude that things would be looking up as the COVID numbers improve. In reality, the US is in the early-cycle recovery phase, which is a tender place to be, but provided no additional shocks to the system happen, we believe the economy will progress toward mid-cycle expansion. This does not mean that we expect the equity (stock) market to go straight up. In fact, we expect it to be jittery. Which is why we say, what really matters is strategy, not predictions.
When you are measuring strategy, a key indicator of success is an annual year-over-year comparison of your net worth. One of the reasons we encourage our clients to meet with us at least three times a year is so that we can establish a “check-in” meeting where we review the progression of their net worth. For those who prefer to monitor it on their own, you can start by creating an excel spreadsheet or Google Sheet (or even a good old piece of paper) and listing the following items out, something like this:
List Your Assets:
The next step is to list all your liabilities:
Once these are calculated, subtract your total liabilities from your total assets. This equals your net worth. The goal is to “Up Your Assets.”
Now that you know your total net worth, get to know your ratios. These are also important indicators of your progress:
Finally, keep track of your credit score. This too is an indicator of your financial health, especially if you are considering borrowing:
