Welcome to Part II of my Financial Management for Disability articles. Since I’ve already discussed the need for financial planning BEFORE a disability occurs, and previously established that YOU are your own best asset, “net worth” is a great place to begin in the planning process.
What I am about to describe is a method developed by me based on my experience as a former Accounting Assistant Professor, as well as a Disability Consultant, the methodology can easily apply to anyone. So, let’s begin.
Place sheet of paper in front of you horizontially. With a ruler divide the page into three equal sections. The first section should be labeled “Assets”, the second “Debt” and the third “Net Worth”. On the first line from the left place a “Minus” (-) Sign and on the second line put an “Equal” (=) sign. Draw a straight line underneath the headings. Assets – Debt = Net Worth.
Assets are tangible objects that you own. Here is a list to work from as you think about and record your assets.
- Money in all bank accounts as of the day you are preparing this list.
- The current market value of your portfolio investments – money market certificates, stocks, bonds, annuities, undistributed retirement accounts, current value of deferred income such as stock options minus broker fixed fees.
- Value of any Life insurance policies currently owned.
- Value of antique collections, jewelry or other tangible property you can sell. (Capital gain items)
- Mortgage current market value. If you really want to find out the current market value of your house and property, a recent evaluation by a broker can be made. Current market value is different from remaining debt4 owed, so an evaluation of your property every few years is helpful.
- Deferred income items with tangible book values.
- Current market value of tangible investment property such as Rental Property.
- Current book value of all vehicles owned.
- Current value of any personal property such as RVs, motorcycles, recreational vehicles such as boats.
- The value of any patents or copyrights owned. (Intangibles.)
Notice that I have not included salaries (income) or expenses. Although income and expenses are budgetary items, they are not part of your net worth. I know the first time I did this analysis for myself, I immediately thought, “WOW, this is a short list!” But, stay with it and complete the sheet as much in detail as you can.
In the middle column, list your debt and think about what you legally owe to institutions.
- Current vehicle or recreational property loan balances.
- Short-term personal or signature bank notes.
- Remaining mortgage and secondary property debt.
- Credit card debt.
- Student loan balances.
- College tuition loans.
- Tangible property debt such as for rental property or other tangible assets.
- Any settlement or contractual debt obligations.
In fact, any legal debt associated with items on your asset list should be included in the debt list. Again, I’m not talking about “income and expenses”, just legal debt. Younger employees just starting out may find the “Asset” list a bit lacking, but then again so should the “Debt” list be short as well.
After you’ve completed your lists, add each column and then subtract your Debt from your Asset list. The remainder is your Net Worth. If you have a negative number, then you have too much debt for the value of assets owned, and there is a financial need. (In this case there is already a financial need BEFORE a disability occurs.)
In looking at your completed analysis consider the following and use the values to calculate “what if” scenarios. Consider the following:
What if our family income was cut in half or stopped? Which assets would I be able to sell and have cash for daily expenses? How long would the cash value of my assets provide financial support for me and my family in the future? In the current economy would the value of my investments provide enough money if my insurer suddently denied my claim?
The big mistake people make in doing this analysis is to immediately list all salary and income as an asset. But consider….does anyone really own future income? And, if you become disabled, your salary will immediately stop anyway. This is perhaps what makes my analysis of Net Worth a bit different from that of a Financial Planner. When all income disappears, insureds will need to turn to their asset liquidatiion for financial support.
The tendency today is for future insureds to carry too much debt. It is not uncommon for insureds to tell me that they’ve sold their home and downgraded lifestyles in order to be able to live on “disability” income. If you happen to have a negative net worth before an unforeseen disability what will happen when there is one?
Net worth doesn’t happen overnight either. Families usually build their net worth over time by increasing property values, or accumulating greater investment income, and/or paying off debt. Should that large tax refund be spent on the family vacation, or a new car downpayment, or should it be applied to a mortgage balance to pay off the house sooner? Although younger workers haven’t had the time to create net worth, they are going out on disability a much younger ages.
Americans living day by day can be caught in a great financial depression if there are no funds saved to rely on. In my last article I alluded to the fact that we’ve become a nation of spenders, not savers. (Recessionary mentality) People look to federal and state governments to pull them out of financial problems, when there are no real benefits offered to them except SSI and SSDI. Workers are forced to use credit cards to finance daily living expenses, probably the worst source of discretionary income there is.
There are only two ways to increase net worth. Either the value of assets are increased, or debt is decreased. Saving money in an interest bearing account is an absolute necessity as is decreasing or eliminating debt. Individuals today are realizing much higher returns on their 401(k)s and investments. Maybe it’s time to take a second look.
The net worth analysis is only the first step toward planning a better financial future whether disability insurers pay your claims or not. The purpose of this series of articles is to encourage people to actually think about their financial futures and stop relying on disability products that can be here today, but gone tomorrow.
If you have a negative net worth and your insurer denies your benefits, you have no assets to rely upon for future financial support. If your net worth is lessened by excessive debt your assets will eventually go toward satisfying that debt. What’s left for you to live on?
Please try the net worth analysis and see what you come up with. It will probably be an eye opener. I was for me!
Part III of Financial Management will deal with Monthly Budgeting of Income and Expenses, prior to and during a period of disability. This can be an eye opener as well.