Judge Your Financial Position

Judge Your Financial Position for Retirement Purpose

If we want to live a Luxury Life after our Retirement then we need to do a good planning for our retirement. For the same we are required to calculate our current financial position or Net Worth and also the expected Net Worth.

Now the question arise in our mind that how will we come to know about our Current Net Worth and Expected Net Worth. Let’s learn about that:

Follow these steps:

(A)  For Calculating the Net Worth:

Step 1.  Calculate your Liquid Assets (Can be converted into cash within short period) e.g. Cash, Bonds, Stocks, Coins etc.

Step 2.  Calculate your Fixed Assets (Can’t be converted into cash within short period) e.g. land, buildings, equipment, machinery, vehicles etc.

Step 3.  Calculate Total Assets

Total Assets =

Liquid Assets + Fixed Assets

Step 4.  Calculate your Short term & Medium term liabilities (Which are expected to be satisfied within one year) e.g. Accounts payable, Wages, Outstanding Bills, Rent etc.

Step 5.  Calculate your Long term liabilities (Which are expected to be satisfied after one year) e.g. Debentures, Mortgage Loan, Education Loan etc.

Step 6.  Calculate Total liabilities

Total liabilities =

Short term & Medium term liabilities + Long term liabilities

Step 7.  Now Calculate Current Net Worth

Net Worth = 

Total Assets- Total liabilities

(B)  For Calculating the Expected Net Worth:

As per some experts Expected Net Worth should be equal roughly your Age, multiplied by your Annual Pretax Income, Divided by 10. This formula is an estimate where you should be today.

Expected Net Worth =

(Age * Annual Pretax Income)/10

(C)  Final Step:

Now you have got your Net Worth and Expected Net Worth also. Do compare your Expected Net Worth with your Net Worth.

If Current Net worth (A) > Expected Net worth (B) = you are going well or your financial position is strong as retirement point of view.

If Current Net worth (A) < Expected Net worth (B) > = you are behind somewhere in your financial planning or your financial position is weak as retirement point of view. 

Example:

For example, if Mr. Farhu Khan is forty-one years old, makes $143,000 a year, and has investments that return another $12,000, he would multiply $155,000 by forty-one. That equals $6,355,000. Dividing by ten, his expected net worth is $635,500.

On the same side Mr. Farhu Khan has $100,000 as Current Assets, $500,000 as Fixed Assets and $20,000 as short term Liabilities $120,000 as long term Liabilities, he would add the Current Assets & Fixed Assets that’s equal to $600,000 and now would add the short term Liabilities & long term Liabilities that’s equal to $140,000.

Now he would subtract the total liabilities ($140,000) from total assets ($600,000) that’s equal to $460,000 which is his Current Net Worth.

Mr. Farhu Khan’s Current Net Worth is $460,000 and Expected net worth is $635,500 which means he is very behind ($635,500-$460,000=$175,500) in his financial planning.

Now after getting this result he can plan accordingly.

We all can also apply this for our financial Planning.............