Net Worth Planning
Net worth planning involves:
* the calculation of current net worth
* setting a net worth goal for next year
* developing specific strategies for meeting that goal
Main reasons for undertaking net worth planning:
1. Establish financial discipline.
2. Prepare a strategy to achieve a future financial target.
3. Measure financial progress on a regular basis.
4. Develop the confidence to feel financially secure about the future.
At a specific point in time, net worth equals:
* Total fair market value of all assets owned (e.g. house, securities) LESS
* All outstanding liabilities owed (e.g. mortgage, loans).
Cash Management Planning
The only way net worth can grow is to have a positive net cash flow, or savings. A zero cash flow can increase net worth if used to pay down debt. Savings are positive when the annual cash inflow exceeds the annual cash outflow. For families with inadequate savings, the technique for improving the cash flow consists of:
* decreasing expenses
* increasing income
* enhancing investment return
Expense reduction techniques include:
* analysis of current expenses
* current expense control
* debt restructuring
Enhanced investment return techniques include:
* reorganization of the investment portfolio
* concentration on tax savings
* conversion of a growth oriented stock portfolio into an income-oriented stock or fixed income portfolio
* asset repositioning
Analysis of Cash Flow Statement
Systematic savings planning strategy refers to the development of specific plans that have the ability to:
* generate the required savings
* systematically direct these savings toward the targeted areas so the specific financial goals can be achieved.
Positive savings increases net worth in one of three ways:
* an increase in assets
* a decrease in liabilities
* or a combination of both
You need to calculate the amount of savings required to achieve each of the specific goals. If actual expenses exceed the estimated expenses, you may either reduce the actual expenses or revise the estimates.
Effective Savings Strategies