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How a Personal Financial Statement Can Guide Your Investment Goals

As investors, we plan for goals such as retirement, funding college for our children, and perhaps even supporting our parents as they get older. In the financial planning process, there are worksheets we can create and update, which may help us map out the best path towards financial goals and track the progress we’re making to get there. Two of those worksheets are the net worth statement and the monthly budget. When you hear ‘budget,’ you may think that sounds elementary, but an awareness of your cash flow is tremendously important to the process of building and maintaining wealth through your investments.

How to Calculate Your Net Worth

Your net worth statement  is essentially a snapshot of where you stand on any given day in terms of assets and liabilities. The Washington Post recently published an example net worth statement as a guide for people who wanted to create their own. Arriving at your current net worth should be a simple process. Add up all of your assets, including investment accounts, cash accounts, real estate, and other valuables such as jewelry, cars, and collectibles. Then add up your outstanding liabilities, including mortgages, car loans, student loan balances, and any other outstanding obligations. Subtract your liabilities from your assets and the result will be your current net worth. You might perform this exercise on a monthly, quarterly, or annual basis to ensure that your overall net worth is moving up, not down. If it’s not moving up, or not moving up at a satisfying pace, this worksheet should help to magnify your financial decisions to see what’s working and what’s not.

Maintain Investments with a Monthly Budget

The monthly budget complements the net worth statement, and details your monthly income and expenses. Organizing and analyzing your income and spending data is key to building and maintaining your net worth. Even if you take home $10,000 or $20,000 per month, those earnings can disappear quickly if you don’t formulate a budget that includes savings and investment targets as mandatory monthly expenses.

For example, let’s say a 35 year-old has a goal of saving $1,000,000 by the time he reaches age 60. If he determines that reaching this goal will require saving $1,500 each month for the next 25 years (plus some expected rate of return in the market), that $1,500 needs to stand boldly on his budget for the entire period. With a defined goal and budget, he can build and update an investment portfolio as the balance continues to grow.

Automating the investing process, generally on a monthly basis, can be an extremely effective method to reach your long term financial goals. The sooner you begin a consistent, systematic investing process, the more time those funds will have to grow and compound.

Personal Financial Statements May Help You Meet Your Investment Goals

Ultimately, it’s important to create a budget and monitor your net worth with some future financial goals in mind; otherwise you may not end up where you’d hoped to be. Asking yourself why am I doing this should help you clarify, and eventually quantify, those future goals. Once you’ve sorted out reasonable spending patterns in areas such as housing, transportation, and food, automating contributions into investment accounts may become the most important part of this process and will set you on a path towards meeting those future financial goals.

Your personal financial statements will also highlight the type of investment vehicles that you are using and can lead you to evaluating whether those are the best vehicles possible. For example, the worksheets will indicate the amount you’re saving in taxable vs. tax-deferred accounts. If your most immediate financial goal is to purchase a home, you may determine a need to reduce your 401K (or other tax-deferred) contributions and focus more on those after-tax accounts. Further, if your net worth sheet shows that 75% of your savings is in bank accounts and money markets, you may need to review your asset allocation to make sure it’s properly reflecting your tolerance for risk and investment objectives.

A few extra minutes dedicated to analyzing your cash flow and current net worth can go a long way towards making progress in your financial life. Why not equip yourself in the best way possible?

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