You must calculate net worth in order to determine the state of your finances. It is the value of all assets minus the amount of all liabilities. Assets are owned goods or properties that have a market value expressed in dollars. They are in bank or brokerage accounts, etc. that show cash values or property that could be sold for a realistic estimated dollar amount.
Bank and brokerage accounts (e.g., savings, checking, certificates of deposit, mutual funds, stocks, and bonds) are considered liquid assets, which means they can be quickly cashed in at a financial institution or sold quickly to obtain the cash value. Other assets are considered illiquid, which means they usually cannot be converted into cash very quickly (e.g., houses, land, cars, artwork, and artifacts). In fact, you may not get the amount you believe they’re worth or you might get more at the time of sale because their value is based on what a buyer is willing to pay a seller at the time of the transaction.
The best assets to own as a bulk of your portfolio is usually a diversified portfolio of company stocks, generally through no-load low-expense stock index mutual funds like an S&P 500 or a total stock market index fund. They have more historical data from which consistently larger positive grow trends can be shown over a ten or more-year investing cycle than any other type of investment. For one who needs short-term protection from the stock market ups and downs, a 25 to 30% portion of investible assets can be put in stable value funds and/or no-load low-expense intermediate bond index mutual funds. In addition, after one pays off all non-mortgage debt, a minimum $10,000 emergency fund should be built and maintained. You may need to build a larger emergency fund if you know that you will soon face an emergency (layoff, large uncovered medical expense, etc.) and will need to cover it and/or household expenses you will not be able to adequately cover based on income.
Other assets (e.g. investment real estate, antique cars, etc.) could be worthwhile but usually require more skill to purchase, properly maintain, and appropriately manage, and accurately determine annual average growth patterns. In addition, they might not provide much risk protection and investing stability when you cannot own enough of them to truly be diversified. Thus, it is recommended that you first build an adequate emergency fund, second build the mutual fund portfolio usually on a dollar cost averaging basis, and then invest in other assets on a debt-free basis.
Liabilities are debts you owe someone else for material goods, services, or loans. This includes such items as business loans, real estate mortgages, student loans, car notes, revolving charge card balances, personal loans, etc. You should engage a debt snowball plan to as quickly as possible pay off what you currently owe because they lead to future trouble due to high finance charges and accumulation of many loans over time. Many people find it hard to make all payments required and live a reasonably comfortable life. They also find that required minimum monthly payments do not stop loan totals from continuing to grow to be more than the amount originally borrowed. Scripture does not give a picture of good and bad debt. It simply tells you to avoid borrowing and co-signing because they make you a slave to the lender, are speculative in nature, and harm the vast majority of people who continually use such methods to fund lifestyle. It confirms assets will be taken from many due to inability to make required payments. Advertisements and temptations convince people debt is great to get everything desired out of life. Yet, every year we see millions of people thrust into poverty due to usurious interest charges (payday & substandard loans), repossession, foreclosure, and bankruptcy.
At least annually, you should calculate your net worth to measure how successful your financial plan or lack of one has been. This will give you an idea of how far into the future you could pay your current debts or expenses if all income stopped coming in. This measurement is necessary because two decades ago the economy changed and layoffs became commonplace in many industries. Today, we see this in a more extreme way in that it has encumbered many of our main economic engines (e.g., banking, mortgage, housing, commercial real estate, automobile, and retail industries).
The ‘lifetime employment with one company dream’ came to a screeching halt. This current trend of changing jobs every 5-7 years, bouts of unemployment, and untimely emergencies and catastrophes that occur in your life should help you understand you will suffer financial hardships and great amounts of stress that will negatively affect your relationships when you do not follow God’s plan for managing finances and building net worth.
A Christian who continuously uses good stewardship will accumulate a greater net worth throughout his life that will allow him to weather economic storms better than others. He will also be motivated to help more people and give more to ministry work than people who are poor stewards who spend all their money on consumer purchases and debt service and thus fail to build wealth.
Please pray for this ministry, email me with any questions, and contact me to speak at your business or ministry conference or workshop. May the LORD bless you richly as you follow His plan!
Genesis 13:2, Job 42:12 Luke 19:2-10, James 5:1-5
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