Your Financial Report Card - Wealth Creation

2006-08-23

It’s doubtful any two financial planners will look at your financial situation and grade you the same way. However, there are a few financial themes that you should examine deeply using your financial data. These general subjects can provide insight into how you view various areas of personal finance and what they may mean.

Amount of Wealth
No one argues that wealth is important. It’s a given that the creation of wealth is the goal of any good financial plan. But the question is, “Does your income and lifestyle correlate with your amount of wealth?” For example, if you earn $1 million a year, but only have a net worth of $100,000, something is off somewhere. But, vice versa, if you earn $25,000 a year and have managed to save the same $100,000, you are well on your way. You can clearly see in the second example that this individual has set goals and is working diligently to reach those goals, while in the first example it is apparent that goals need to be redefined.

Quality of Wealth
What form of wealth do you have? Do you have “Cash in the Bank” or does your wealth “Reside on Paper”? Cash on hand in the bank is usually better than cars or pesonal property that will depreciate over time. Potentially good wealth that may reside on paper include, your home, secondary home, income producing rental property, etc. These should appreciate over time, but will be tied to market conditions. The ideal scenario is to have a good mixture of assets and cash. Personal property (items other than your home) should account for about 10% of your net wealth.

Personal property items that are deemed difficult to sell - or sell at reasonable prices - you may have an asset quality problem. These assets include things like cars, RVs, boats, and mobile homes tend to depreciate in value at an ever increasing rate.

Continue to Part 2 of Your Financial Report Card

Related Articles:
» The Four Financial Baskets
» Building Wealth
» CDs, Money Market Funds and Savings Accounts Oh My!

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