Q. Is there any value to calculating one’s net worth, as opposed to, say, monthly net spendable income? If net worth does, in fact, have some relevance, how should a guaranteed, defined benefit pension be figured into the net worth?
— Counting my chickens
A. These calculations are helpful for several reasons.
First, a net worth analysis and a net spendable income analysis are used for two completely separate things.
“If you want to understand if your net income can support your spending goals, that is when the net spendable income analysis comes into play,” said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield. “It can also come into play when applying for loans like a car loan or a mortgage.”
Power said a net worth analysis is typically done to see how much you have accumulated in assets above and beyond any debts you are carrying.
This may or may not be important to help you understand if you have accumulated enough assets to help you reach your financial goals, he said.
“Some people have strong enough net spendable income to support their lifestyles and may not have much of a net worth at all,” he said. “Others may have accumulated substantial net worth but have scant net spendable income and need to depend on their assets to help support their lifestyle.”
In most cases, Power said, it is important to do both analyses to get a complete picture of one’s financial health. Lending institutions would want both and any financial advice-giver would want to have both analyses done, he said.
“As far as your pension goes, this is strictly a cash flow item but most employers will calculate a lump sum present value of your future pension payments that you can list on your net worth with a footnote that it will paid as a monthly cash flow,” he said.
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