Wealth Institute

Your Personal Net Worth Statement

The balance between saving, investing, borrowing, and spending creates a representation of your personal net worth statement.
July 2016
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As you navigate along the roadmap of your life, the amount of financial resources available to you to help you go where you want and do what you want will vary. Your success in some part will depend on how well you adapt financially to the obstacles you encounter along the way as you balance your decisions between saving, investing, borrowing, and spending.

The balance between these four decisions can be represented on your personal net worth statement. Saving and investing increases the assets available from your personal net worth, while spending decreases your assets. In the short term, borrowing both increases your assets and increases your debts, effectively offsetting each other in terms of changes to your net worth. In the long term, borrowing can be beneficial to helping you achieve your goals.

As you start building your career, a loan can help to purchase a car for you to travel to work each day to earn income. But this loan has an offsetting cost in the form of interest that is required, in addition to each loan principal repayment until the amount of the loan is repaid. The decisions that you make to balance saving, investing, borrowing and spending will have a profound impact on the financial resources available that allow you to meet your day-to-day needs and reach your longer term goals.

The choice between borrowing and spending money depends on your priorities. Is it better to finance lifestyle choices or make purchases today; or to finance purchases or investments that have the ability to increase wealth and/or income in the future. Conversely, when money is saved or invested, it is with the intent of sacrificing today to increase tomorrow’s enjoyment. However you choose to use your money, after paying for your necessary expenses, you will have to regularly decide if it is better to spend extra cash flow on material items that are currently of interest, to pay down debts, or invest for your future.

The need to be more entrepreneurial with your personal finances

The choices that well-run businesses make about borrowing, spending, saving, and investing are most often made with one goal in mind: to be successful. Businesses that do this well will stay focused on this goal and will adapt when changes in the business life cycle require decisions to be made in order to sustain success. The definition of success for business owners can vary, but most often it may comprise of one or more of the following: making enough money to earn a living; increasing profitability; doing something they’re passionate about; and that allows them to spend more time with family. Comparatively, if you are not a business owner, you should also employ the same entrepreneurial drive and focus to achieve similar successes with your own personal finances.

Is it better to purchase a luxury product, make a payment to reduce a line of credit, or invest with the goal of earning future dividends, interest, rental income, or capital gains? Often your current stage in life will have an impact on the financial decisions that are made about borrowing, spending, saving, and investing.

In a recent survey conducted by BMO Wealth Institute, Americans were asked about their current and planned saving, investing, borrowing and spending.¹ When asked what is the single financial priority that is most important to you? three main answers emerged: reducing or eliminating debt (31%), saving more (26%), and investing effectively and tax efficiently (21%). Spending on personal needs or goals was well behind at only 4%. Not surprisingly, survey respondents age 18-34 favored saving more, people age 35-54 focused on reducing or eliminating debt, and those age 55 and over comparatively prioritized investing effectively and tax efficiently. These differences are shown in the graphs below. As financial needs and goals are always changing as people move from one life stage to the next, it is important to aim to be as financially flexible as a business to be most successful. This means being able to change and adapt financial strategies to meet changing needs as situations evolve.

Most important financial priorities at this stage of life

Most important financial priorities at this stage of life

Source: BMO Wealth Institute survey by ValidateIt Technologies Inc., April 2016.

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¹ BMO Life Events Survey USA, conducted by ValidateIt for the BMO Wealth Institute between April 14-19, 2016. The online sample size was 1,018 Americans aged 18 and over across United States and key states of Arizona, Florida, Illinois, Indiana, and Wisconsin. Overall probability results for a sample of this size would be accurate to within +/- 3.07% 19 times out of 20.

The foregoing summary is not based upon the factual situation of any specific taxpayer, is not intended to be tax advice to any taxpayer and is not intended to be relied upon.
BMO Global Asset Management does not offer tax advice. Contact your tax advisor.
This information cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. This information is being used to support the promotion or marketing of the planning strategies discussed herein. BMO Financial Group and its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors.
Estate planning requires legal assistance which BMO Financial Group and its affiliates do not provide. You should discuss your particular estate-planning situation with a qualified attorney.
BMO Wealth Institute, a unit of BMO Financial Group, provides this commentary to clients for informational purposes only. The comments included in this document are general in nature and should not be construed as legal, tax or financial advice to any party. Particular investments or financial plans should be evaluated relative to each individual, and professional advice should be obtained with respect to any circumstance.
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