September, 2022 | Live a Life By Design

What Is Your Net Worth?

Posted on September 23, 2022September 23, 2022 by Jimmy J. Williams, CPA/PFS, CFP®

As a result of the economic disruption of the past two years, many people are becoming confused and concerned as to the sufficiency of their financial wealth in maintaining their lifestyle. Fear has a means of causing one to doubt previously acceptable strategies and financial reserves as supportive of your future. By focusing on the factors, you can control, you will regain your confidence and build competence to achieve your future no matter the market conditions.

First, it is critical that you understand your current financial state. To do this it is necessary that you look earnestly at your overall finances in a manner that provides you the most information. One document that will help you capture this information in a succinct manner is a personal financial statement. This report is a snapshot of your assets (the items you own), your liabilities (the amounts you owe to others) and your net worth (an arithmetic function of assets minus liabilities). Let’s assume you own assets valued at $3,000,000 and have liabilities of $1,000,000. Your current net worth, in the most simplistic of terms, would be $2,000,000.

By understanding what you own and how much you owe others, you may now start the planning process for the future. You know the old saying, “It is hard to get to where you wish to go if you don’t where you are.” This document can be a very useful tool for an individual planning for her future. Exam the personal financial statement and notice those assets that may create income and those that simply grow in value. Perhaps on your financial statement there are assets that are idle and incur expenses without generating income to offset their maintenance.

Examining the liabilities, you may calculate several important ratios or factors that will help you achieve greater net worth. For example, if your indebtedness is secured by collateral, what is the value of the asset? Is it sufficient to allow the indebtedness to be liquidated by selling the asset? What is my weighted average cost of borrowing? These are important questions to consider when creating a financial plan.

Taxes are often overlooked on a personal financial statement. This is one liability that must be considered in the statement since it is prevalent in our country and will require assets to achieve the payment. Taxes are owed in many forms – estate, sales, income, property, etc. I am reminded of the poem authored and published by the Adam Smith Institute that reads in part, “Tax his cigars, tax his beers, if he cries then tax his tears. Tax all he has, then let him know, that you won’t be done til he has no dough. When he screams and hollers, then tax him some more, tax him til he’s good and sore.” A little levity is always good when talking about a portion of one’s lifetime income being sent to a taxing authority.

The final step is to analyze the change in your net worth. Are you growing in net worth or are you losing ground? It is critical to understand the net worth you possess so that you can work with this amount for purposes of funding your future lifestyle. Review your net worth over the past ten years and note the growth trend you experienced. Are you consistently increasing in net worth prior to retirement? If not, adjustments must be made in your assets that you purchase and the indebtedness you incur.

To fully understand the development and uses of a personal financial statement, seek the assistance of a CERTIFIED FINANCIAL PLANNER™ professional. To create a pathway to success, you must first establish your current point in time and net worth. You owe it to your family and yourself to be as capable as you can possibly be to direct your efforts to the future of your design. See you on the gridiron!

Related Podcasts

The Most Critical Action for Success

Posted on September 8, 2022 by Jimmy J. Williams, CPA/PFS, CFP®

The focus of my articles has been the creation of great value in the lives of the readers. Many of our articles focus on the financial and planning aspects of life. This one is a little different in the terms of investing in yourself.

Many of us would agree that it doesn’t matter where you start in life to determine if you’re successful. It is always the activities and decisions between birth and death that define success. In that regard, it is the proper environment of economic, social and familial contributions that provide a proper society to allow for your growth as a leading society in the world.

Recently, we have developed as a nation that lacks the unity required to maintain our status as a world economic power (this article will disregard military implications and scenarios since it is not my expertise). Differing ideas and philosophies of social services and generational paradigms cause us to forget our reasons for founding this wonderful country. One of the basic premises of building a society that allows its citizens to thrive is the belief that all men are created equal. This unity in freedom is the foundation for our economic wealth in the United States of America.

As an entrepreneur, it is imperative that we develop a service or product that delivers great value to the marketplace. One of the means for which the marketplace grows in its own wealth is through the robust economy we develop. Think about some of the less developed countries on the globe. They lack simple public services such as drinking water in ample supply, food, shelter that is affordable and medical care that is designed to increase their happiness in life. We possess all the benefits of our society and a great financial economy through a stable a banking system that is liquid and allows for its customers to borrow with reasonable terms.

One of the phrases I have heard during my adult life is that “a rising tide raises all boats in the harbor”. To define this phrase in business terms, it is critical that some of our citizens generate capital through products and services to provide jobs for the mass of our fellow citizens. The disruption we experienced during the pandemic has been a challenge to return to “normal”. It is a challenge that we will overcome to create the greatest economy in the world once more.

First, we must not waste our natural resources but rather utilize them in an efficient and effective manner to generate the value we seek. In the current social environment, it is difficult for me to understand the elimination of any aspect of our energy production for the sake of another person’s idea of conservation of resources. For example, wind energy is a great augment to our current power grid of electricity. However, it is not sustainable as a primary source by itself.

Second, every member of our society is afforded opportunities to improve himself. Our country is known for the life improvements gained by valid immigrants who see the opportunities in the United States of America that aren’t available in their homeland. Having traveled our country extensively, I have been honored to meet many of these very successful people who are grateful for the opportunity of wealth that has been afforded them because of our country’s freedoms and rights.

To reach our potential as a country and an economy it is vital that we all recall those beliefs and traits we all share – freedom to live in the manner we desire without government mandate of religion, business and other aspects of life. The division facing our country can be healed if we the people will focus on the overall good that life brings when we all work together. I am strong proponent for the capitalistic system of our economy. For those who wish to achieve financial independence, you can do so in the United States of America. For those who wish to live a different lifestyle in a more modest means, that, too, is your choice and available.

Think about the great freedoms and rights we hold as citizens of the greatest country on the planet. Join minds, hearts and hands and let’s bring back the powerful traits of unity and freedom to all Americans. You will find that success awaits us when we are stronger together!

Related Podcasts

New Tax Law, New Opportunities

Posted on September 1, 2022September 1, 2022 by Jimmy J. Williams, CPA/PFS, CFP®

One thing in life you can always count on is that tax laws will never be simple in language or applicability! President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022. Immediately, much hoopla ensued from the Biden Administration touting its effectiveness and from opponents as to its contribution to inflation instead of reducing the negative economic impact. The law is more than 300 pages in length and contains some of the most difficult language for citizens to apply to their person financial situations. However, lets review a few of the provisions of the law that applies to individuals.

A major funding measure of the bill is to increase, or some say replace, the number of IRS agents and revenue officers employed in the areas of audits and tax collections. It is not contained within the law but many of the lawmakers are parroting the intent was that individuals earning greater than $400,000 annually would be subject to increased scrutiny by IRS audits. Realistically, if your return were to report less than the aforementioned amount while containing information that is suspect, you may be selected for audit. The IRS uses an algorithm to select returns for audit and the variables of the selection formula are not disclosed to the public. Consequently, Treasury Secretary Janet Yellen has issued a directive that the IRS should implement new compliance programs in a manner as to not increase examinations of taxpayers earning less than $400,000.

The majority of the law’s provisions pertain to green energy in the form of tax credits. One of the major areas of green energy investment that may apply to a greater number of individuals is the credit for the purchase of clean vehicles (a.k.a., electric vehicles). To claim the maximum amount of the credit of $7,500, the taxpayer must meet vehicle manufacturing criteria as well as income limitations. For example, the automobile shall be produced by a specific qualified manufacturer (i.e., defined as one that primarily utilizes union labor), its final assembly is in North America and the components must be sourced to a U.S. manufacturer or any country with which the U.S. has a free trade agreement in effect. For purposes of annual income limitations, individuals earning more than $150,000, head of household filers earning more than $225,000 and married filing joint filers earning more than $300,000 would not be availed the credit. These criteria will make it difficult for many individuals to take advantage of the credit.

Additional limitations in the law impact the purchase price of the clean vehicle. If the manufacturer’s suggested retail price exceeds $80,000 for vans, sport utility vehicles, and pickup trucks as well $55,000 for any other types of vehicles, the buyer will not be allowed to claim the credit of $7,500 for federal tax purposes. If you were hoping for a Tesla Model 3, this credit will not help you purchase the car!

Homeowners may benefit from the law by installing qualified energy efficient windows, doors and HVAC systems as well as heat pumps. The limit is applied annually for the credit of $1,200.

Coincidentally, the limitation on state and local tax deductions for individuals was not addressed in the law. Individuals may deduct, as an itemized deduction, an amount of $10,000 of state and local taxes. In states, such as California and New York, where individuals are subject to higher income tax rates than many of the other states, taxpayers are feeling a pinch because of the nondeductible portion of their state and local income taxes. Time will tell if this area of taxation is addressed in the future.

Taxes are part of living in a civilized society. Many people show tremendous disdain for paying any taxes subjected to their income. However, our wonderful country and state would not function for the purposes of society without funding. It is critical that you comply with the complex tax laws of our nation and state. If you have a question as to the applicability of a tax law or simply wish to plan for the future to reduce your tax burden, it is imperative you visit a CERTIFIED FINANCIAL PLANNER™ professional. Real tax savings may be gained by managing your income and tax burden in the proper manner. Welcome to football season!!