Wednesday, September 9, 2009

How Much Do You Have in Net Investible Assets?

You’ve probably heard of Net Worth as a term used to measure your wealth. It’s a simple calculation of Assets – Liabilities. But many financial advisors do not consider Net Worth to be an accurate assessment of your wealth. Oh, and first a reminder, “wealth” is not equal to “rich”, it is just a word to describe the value of your money. Okay, now back to our topic.

Net Worth assumes that if you needed to sell your assets—like cars, a house, jewelry—that you would receive current value. That’s rarely the case. Net Investible Assets, however, determines the amount of money that you have to invest. Financial advisors like to look at this value because it tells them how much of their client’s money is available to work with.

To calculate your Net Investible Assets add all your savings and investments and subtract your consumer debt (credit cards and loans). Don’t look at how much equity you have in your home or the appraised value of your wedding ring and grandmother’s jewelry or your family mountain home. This leaves you with investable assets. This tells you how much money you have available without selling all your personal properties.

If you begin to look at your financial position using Net Investible Assets you might start looking at your financial picture a bit differently. Although investment advisors may include emergency and regular savings accounts in your Net Investible Assets calculation, I would suggest that you take these out of the equation. Look at your Net Investible Assets as money that you can invest and leave the other savings for their intended purposes. And like your other savings, assign a goal to any funds that are included in your Net Investible Assets. If you are just starting to build these funds establish a savings vehicle that you can regularly and automatically fund. If you are working with an advisor, tell them upfront that this is the money you’ve allocated toward investing. Protect your emergency and regular savings to use when needed.

Looking only at your Net Worth can be a way to deceive yourself into thinking that you’re in good financial health. The Net Investible Assets calculation can be sadly eye-opening.

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