How financially healthy are you? Do you really know? There is one number that helps you determine your financial health more than any other number – that is ‘net worth’. Most people do not know how to calculate their net worth. Now, if they did, they would be more aware of their financial situation.
Knowing your net worth can be as important as knowing your heart rate or your blood pressure. Unlike blood pressure though, the growth of your net worth should be one of your most important life goals. Obviously having a healthy heart rate and blood pressure are also important to be able to enjoy your wealth.
Net worth is determined by subtracting what you owe (like credit cards, car loans, personal loans, student debt, mortgages, etc.) by what you own (like investments, house value and other property like art, cars, etc.). My challenge to you right now is to stop and calculate this number for yourself to determine your present net worth. Sometimes it can be negative if you owe more than what you own. Don’t despair though if this is the case. Following my suggestions in this book could help you grow your net worth in the positive.
Now let’s say most of your assets are in one sector of the economy (like real estate) or invested in only one or two financial sectors. Then you are not well diversified. Having most of your money in one sector of the economy can make your investment portfolio more vulnerable to market fluctuations. I generally encourage my clients to be well diversified by having most of their assets in well managed investments in a broad range of sectors like financials, industrials, consumer goods, energy, health care and the like. Diversification can help protect a client’s net worth.
Being too heavily weighted in one sector of the economy is basically putting all your eggs in one basket. Depending on investment profile, it may be better to be more diversified and having your eggs in many baskets to help take advantage of other sectors of the economy. Working with a good financial security advisor can help with this selection.