Keith Schwanz

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This article was written on 01 Jan 2007, and is filed under Personal Finance.

Net Worth and Financial Stability

My father has more money today than he earned in 31 years of pastoral ministry. And he’s given tens of thousands of dollars away—some to family members, most to missions.

As a pastor, Dad always served small- to mid-sized congregations. Because he was a carpenter, congregations that needed something constructed often called him to be their pastor. He remodeled parsonages, built educational wings, and designed church buildings. Dad never earned a lot. When he started in the 1940s he received $10 per week from a small congregation in Nebraska and lived in a house the church rented for $10 a month. When he retired from pastoral ministry in the 1970s he was making $140 per week.

If financial stability depended on income, my father would be in a terrible predicament as an 89-year-old retired pastor. The key measure of a solid financial foundation, however, is not income, but net worth. Even a person with limited income can experience net worth increase over time.

Calculating net worth is a simple matter of adding and subtracting (see sidebar). Add up the value of what you OWN: house, car, investment accounts, etc. Total what you OWE: mortgage, consumer debt, installment loans, etc. Subtract what you OWE from what you OWN to get your net worth.

If the result is less than zero, you have a negative net worth. I’ve talked with students who leave school with a negative net worth because of student loans and/or credit card debt. You’ll improve your net worth as you eliminate what you owe. On the positive side, your net worth will increase as you save and invest wisely. Remember, income itself doesn’t increase net worth unless some of it is added to a savings or investment account. Financial security will rise with your net worth, but only if you regularly add to your holdings.

My parents were late to begin thinking in terms of net worth. In the early 1990s Dad was involved in a near fatal car accident. The relatively small insurance settlement became the initial contribution in a comprehensive investment strategy. When Dad retired from pastoral ministry, my parents moved into a house he built. Their mortgage was only about $25,000 as most of the investment was sweat equity. Twenty years later, when health concerns prompted a move, they sold their house and invested the proceeds. Managing these two events well was essential in my parents’ financial security in their final years.

In contrast, my wife and I have taken a proactive approach. We will not rely on the possibility that while in our mid-70s a teenager will run a red light, send us to the hospital for several days, then home to recuperate for weeks while waiting for an insurance settlement. Instead, each month we contribute to retirement and other investment accounts. We purchased a house and selected a mortgage with the impact on our net worth as part of the decision-making process.

I calculate our net worth on the final day of each quarter. I’ve set up a spreadsheet, so it just takes a few minutes four times a year. I print a graph that charts our progress, then Judi and I talk about what we see in the data. This quarterly checkup helps us identify necessary adjustments as we seek to build greater financial stability.

If figuring your net worth each quarter seems too frequent, then at least do an annual checkup. The first of each year as you begin collecting documents to prepare income taxes is a good time to also figure your net worth.

I calculate my father’s net worth once a year, then share the statement with my siblings. We’ve been surprised at how consistent Dad’s net worth has been. In spite of the increased healthcare expenses in the months before my mother died, and now with Dad’s growing needs, his net worth continues to be in the same range it was 10 years ago. He achieved a balance point where his net worth, though modest, is adequate for the additional expenses he faces. For the expenditures beyond what Social Security and pension payments cover, Dad lives off of the investment return without touching the principal. My brothers, sister, and I find great comfort in the fact that Dad will never face financial hardship again. His net worth provides what his income never could.

Originally published by Pensions & Benefits USA.

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