Are You Tracking Your Financial Grade?
When we were in school, it was not only parents but also noteworthy students who were grade-conscious. Exam results, medals and recognitions became the bases for favors, especially during shopping sprees. Grades turned out to be the ultimate bargaining power!
Students who were described as carefree and infamous, on the other hands, were the ones who frequented the principal’s office, a situation made worse if their parents or guardians were present.
Standings can be easily be monitored while still in school. However, after graduating, how can we track our performance in life? Unfortunately, most people are clueless. Do we really know our goals? Moreover, how should these goals be achieved?
If you are wondering if you are really on track towards sound and financially-free living, monitoring your net worth is the way to go. In real life, your net worth is your final grade.
You may be thinking that by adding up all the good stuff you’ve acquired—the nice house, huge LED TV, a red sports car and the like—will give you an accurate figure of your real net worth. An annual income with lots of zeros after the first figure as well as living in a fantabulous mansion in a first-class subdivision are no measures of affluence if these are paired with heavy loans or debts.
Basically, our net worth is equal to the sum of all our assets minus all liabilities. Government employees and officials may be more familiar with this as they need to regularly file their SALNs (statements of assets, liabilities and net worth). Still, most of them do not really understand the importance of doing so, and what more the rest of us? Unlike most of us, Americans are serious in monitoring their net worth. This is their means to determine if they are solvent or bankrupt. Unfortunately, this is not the case in the Philippines.
Comparing your net worth with others is not consequential. Instead, use net worth targets based on your current age. As a general rule while in your 20s, no net worth amount is recommended. Having no property acquisitions is understandable but no savings is unacceptable. Once you start working, it is imperative that you embark on building your emergency and retirement funds.
When you reach your 30s, your net worth ideally should be equal to half of your annual salary when you were in your 20s. If your annual salary at that time was P360,000, for example, then you must at least have P180,000 net worth. By age 40, your net worth must be twice your annual salary when you were in your 30s, meaning if your annual salary was P600,000, then your net worth should be P1,200,000.
When you reach age 50, your ideal net worth should be 4x your annual salary in your 40s, and once you reach 60, your ideal net worth must be 6x your annual salary when you were in your 50s.
Tracking our net worth is as important as looking at our success in school. When you know how you are doing you know what you need to focus on. It’s easy to be swept away by filling your life with things that make you wealthy and successful. If in school having lots of extra curricular activities did not always mean nice grades, it’s the same thing in life. Buying all the stuff to look wealthy will not guarantee a gracious retirement.
Christopher G. Cervantes is a Registered Financial Planner of RFP Philippines. He is author of Financial Planning for the Fast Changing World and The Seed Money. To learn more about personal-financial planning, attend the 66th RFP program this November. To inquire, e-mail firstname.lastname@example.org or text <name><email><RFP> to 0917-9689774.
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