Finding Your True Net Worth
Knowing your net worth is an essential step in fine-tuning your financial plan. It can help you more accurately decide how to invest, how quickly to pay off debt and how to plan your estate and other financial matters, such as whether to lend money to family members.
Calculating your net worth may seem basic at first glance: add up assets and subtract liabilities. But the net worth equation is a bit more complicated. Costs such as real estate brokerage commissions, taxes and other expenses triggered by liquidating non-cash assets can affect the final figure. As a result, always remember to factor in these expenses so that you don't overestimate your true net worth, which could potentially lead to ill-informed financial decisions.
When you set about determining your net worth, consider what it would cost to turn the following assets into cash:
Investment securities. Drawing on assets held in taxable accounts or conventional retirement accounts triggers both federal and state income taxes. And in most cases, they'll trigger a 10% federal penalty for investors who are younger than 59-1/2 (a state penalty may also apply). Sales from Roth IRAs or Roth 401(k) accounts do not trigger taxes.
Real estate. An accurate picture of your real estate assets requires more than an estimate of your property's current market value. You also must account for the effects of brokerage commissions and taxes. Brokers typically charge up to 6% to help sell buildings, and may charge up to 10% for sales of undeveloped land.
Personal property. It's easy to overestimate the value of personal property such as automobiles, boats, jewelry, furniture or art. For an accurate picture of the value of cars or trucks, visit the websites for Kelley Blue Book (kbb.com) or the National Auto Dealers Association (nada.com).
Effective financial planning requires an accurate picture of your net worth. Factoring in the costs of liquidating non-cash assets can help you zero in on the true value, giving you the information you need to make the right decisions for managing your wealth. And don't forget to consult with a tax advisor for any questions you may have.
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Calculating your net worth may seem basic at first glance: add up assets and subtract liabilities. But the net worth equation is a bit more complicated. Costs such as real estate brokerage commissions, taxes and other expenses triggered by liquidating non-cash assets can affect the final figure. As a result, always remember to factor in these expenses so that you don't overestimate your true net worth, which could potentially lead to ill-informed financial decisions.
When you set about determining your net worth, consider what it would cost to turn the following assets into cash:
Investment securities. Drawing on assets held in taxable accounts or conventional retirement accounts triggers both federal and state income taxes. And in most cases, they'll trigger a 10% federal penalty for investors who are younger than 59-1/2 (a state penalty may also apply). Sales from Roth IRAs or Roth 401(k) accounts do not trigger taxes.
Real estate. An accurate picture of your real estate assets requires more than an estimate of your property's current market value. You also must account for the effects of brokerage commissions and taxes. Brokers typically charge up to 6% to help sell buildings, and may charge up to 10% for sales of undeveloped land.
Personal property. It's easy to overestimate the value of personal property such as automobiles, boats, jewelry, furniture or art. For an accurate picture of the value of cars or trucks, visit the websites for Kelley Blue Book (kbb.com) or the National Auto Dealers Association (nada.com).
Effective financial planning requires an accurate picture of your net worth. Factoring in the costs of liquidating non-cash assets can help you zero in on the true value, giving you the information you need to make the right decisions for managing your wealth. And don't forget to consult with a tax advisor for any questions you may have.
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posted by Bob Moser at
7:54 PM
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