Dave Sather's Money Matters: Benchmarking goals for 2011

Dec. 28, 2010 at 6:28 a.m.

This week, we say goodbye to 2010 and usher in a new year. Given everything the financial markets experienced, it is often tough to know if we are making progress.

Probably the simplest way to gauge progress is via the net worth statement. When we meet with a new client, we ask for this statement to see a summary of all their assets and liabilities. Although some people update this statement monthly, quarterly probably works better because you don't want to over analyze matters.

At a minimum, everyone should compile their net worth annually and compare it to previous years to learn if you are drowning in debt or well on your way to financial security.

It is helpful to have the details associated with each item on the net worth statement. For instance, what is the interest rate, the payment and the remaining principal balance for a given debt? A simple review of these items might help you to assess whether you are paying too much interest and need to refinance, or simply pay extra principal on an item.

Once we have preliminary data, it should be broken down between liquid assets and non-liquid assets. Liquid assets include cash, money markets, CDs, stocks, bonds, mutual funds, etc. Non-liquid assets include your home, other real estate, a business, cars, boats, campers, motorcycles or anything else not readily convertible into cash.

The reason for differentiating between liquid and non-liquid assets is that we often fudge the numbers. We like to value a truck higher than it is really worth. We kid ourselves that our house still commands top dollar. We argue that the old car in the barn is a desirable collectible, when in reality it is a hunk of junk.

We use creative accounting when assessing non-liquid assets because they hold subjective values and can inflate our estimated net worth. It is also the easiest way to get into trouble by overestimating the flexibility associated with your assets.

Focus the majority of your attention on liquid assets simply because the values are published on a daily basis, and they can be used to get out of trouble quickly. Liquid assets provide options.

Each January, I run my numbers. Did they go up? How much did they go up? Determine the answers not only in raw dollars, but also in percentages.

This process helps you to know whether you are saving enough or paying down debt on schedule. It allows you to assess your asset allocation.

Do you have investments structured correctly, and are they getting you where you want to go? Or, did you take on too much risk and therefore need to save more in subsequent years to pull out of a hole?

For the new year, do some goal setting. How much do you want to save going forward to increase your net worth by a certain dollar amount, as well as percentage? This should address amounts going into IRA's and retirement plans, short term funds and long term savings.

A similar process should be used when looking at debts.

After the total amounts are identified, figure out how much you need to allocate to savings or debt reduction on a monthly or weekly basis.

By putting these goals at the top of your budget, as opposed to being an afterthought, you are far more likely to succeed.

With 2011 right around the corner, now is the time to dust off your financial roadmap and determine where your finances are now, and more importantly, where you want them to be.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.



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