It’s 2008! Do you know where your net worth is?

I calculate our family Net Worth every year during tax season as I am thinking about money, fretting about taxes and have all of the documents ?handy.

It is a useful exercise but really only a ‘feel-good’ (or bad) exercise which really has no grounding in how you are doing financially or emotionally. It is reassuring if you see your calculated net worth climb year after year but don’t rest just yet! Anyhow, you will have plenty of time when you have a dirt nap. I am always skeptical about a Calculated value as it is always based on Assumptions and assumptions are often inaccurate. We need calculated values but just as Absolute numbers hold less value to me than Trends and Relative numbers, always look at the source of the numbers.

For example, when you calculate your net worth you are almost always guessing about the current value of your home. If we are homeowners it is very likely that our largest financial ‘Asset’ is our home but it is really difficult to spend your home. Sure what about Reverse Mortgages? Although RM’s may be appropriate for some people, they should be considered more as a Plan D than part of a comprehensive financial plan.

Set Worth is the total combined value of all true assets ie. those assets capable of putting money in your pocket on a recurrent basis. Traditionally, these Income Producing Assets (IPAs) include savings accounts, stock dividends, bonds, trust distributions, GICs, personal loans and rent from land or property. You should work backwards, starting with the amount of Income deemed necessary and sufficient, in order to determine your Set Worth Goal. Individual IPAs will most likely have different Rate of Returns and even different tax rates.

A fee-based financial advisor can help calculate actual/net income from your personal Set Worth Portfolio.

I am not interested in income right now as I do not want to pay more taxes while I am working. I am looking for future income. What types of investments allow deferral of income and tax?

1) Registered Savings Plans: generally allow accumulation of wealth until a certain age at which time substantial withdrawls (and tax) are required.

2) Dividend Income: in Canada substantial income from ‘eligible’ Canadian companies can be realized annually…. TAX FREE! Have a look at the Dividend Tax Credit and Marginal Tax Rate information.  An individual living in BC can earn over $60,000 per year from eligible dividends and pay no tax.

3) TFSP’s: another Canadian vehicle. The newly introduced (2009) Tax-Free Savings Plans allow individuals to contribute up to $5000 annually (after-tax dollars) to the plan but the investments grow Tax-free and more importantly can be withdrawn Tax-Free. Not only that but any room created by withdrawing money can be refilled at any time. I will spend an entire post on this as 2008 winds up and the final details become clear.

4) Rental Income: with proper consideration the mortgages rental property can be paid off in full by the time income is needed. Expenses can still be claimed as tax deductions but more income can be utilized from the monthly rents. The property owner even has the option of selling the property yet holding the mortgage which would supply a steady stream of income without the hassle of managing the property.

5) Businesses: if one has the experience, knowledge and gumption to invest in the businesses of others, considerable revenue can be obtained on a recurrent basis. Business owners may elect to sell their business to another person who pays them out over many years. Angel investors generally loan money to small businesses or ventures with the plan to gain substantial returns over the next 1-3 years.

What is your Set Worth plan?

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