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Finance

How to Increase Your Disposable Income

1. Get a Raise – or a Second Job

There is no shortage of books and articles that give advice about getting more money out of your employer. Their counsel includes everything from dressing well to taking a pay cut in exchange for performance bonuses. One of the most highly touted techniques is to go for further training or education. This can cost you money now, but it will hopefully translate into higher wages and a more secure position in the company.

Regardless of how you go about it, getting a raise is the most obvious way to increase your income. Along the same lines is the possibility of having another job on the side. Working two jobs in tandem can be physically and mentally draining, but it will bring more money in when you need it.

The problem with increasing your income through your job is that you expose yourself to increased income taxes. The loss resulting from entering a higher income bracket is not prohibitive, but it is discouraging. You are working harder and often longer hours, but the returns on your effort are diminishing as your income tax rate increases. Basically, you have to work harder just to add a little more to your pocket.

This is compounded by the fact that most people never really profit from the extra wages because their lifestyles adjust to absorb it. For example, you may notice that your taxes have increased so, in order to minimize your tax bill, you decide to move into a bigger house to take more advantage of the homeowner’s deductionon the mortgage. Although you can technically afford it, the larger mortgage payment leaves you with the same disposable income as before.

2. Start a Business

Starting a business, even a small one, is a legitimate way to bolster your income. Much like a raise or second job, running a business will put more demands on your time and require more effort. The difference is that you will see more of the income from your labor because taxation for business owners is a small pinch when compared to the slap that the IRS gives to employees. Some of your business write-offs can even be claimed against other income sources, but you have to follow the rules carefully.

3. Investment Income

Investment income is considered a form of passive income. That’s a bit of a misnomer, because it does take active effort to create income from investing – you have to research investments, build and maintain your portfolio, etc. – but it is generally considered to take less effort than, let’s say, shoveling concrete day in and day out. Investing income can come from stocks, bonds, real estate, or many other types of assets. The common theme is that they ideally produce a return on the money you put into them.

Creating income through investing is a process of accumulation. Even if you consistently get a return on investments (ROI) of 20%, if you only have $1,000 in the investment, you will add a little less than $200 to your yearly income after any fees and taxes have been paid (and there is no guarantee of consistent returns of even 10%). Searching for stocks with a history of dividends, sometimes called income stocks, can help create some income now, but it will still not be as rapid in results as a second job.

As you put more money in, however, more money comes out in the form of returns. Investing is a great way to increase your disposable income in the long run, but it won’t do wonders for your immediate situation unless you have a huge chunk of capital just sitting around. Investing takes patience, time and discipline (it is also subject to taxation). That said, it is one of the surest ways to gradually add to your disposable income without exerting yourself too much.

4. Spend Less

The best way to increase your disposable income is by spending less. Tightening your budget will take some effort in the form of sacrificing a few luxuries, but the increase to your disposable income will not require longer hours or incur any extra tax. The more after-tax dollars you hold onto, the easier it is to do things like investing to secure more income in the future.

You don’t have to scour the classifieds or create a business model or subscribe to a bunch of financial magazines – you just have to shell out less  than you currently are, and certainly less than you are currently making. Earning more may help you, but spending less is the only iron-clad solution to the problem of living paycheck to paycheck and never having enough.

The Bottom Line

Of all the ways to increase your disposable income, the simplest one is by far the best. Spending less/saving more can be used in conjunction with any of the other strategies. It’s also the only one that isn’t going to affect your taxes or require more of your time. In the words of Benjamin Franklin, “If you know how to spend less than you get, then you have the philosopher’s stone.”

How to Calculate Your Tangible Net Worth

You can calculate your net worth by subtracting your liabilities from your assets. If your assets exceed your liabilities, you will have a positive net worth. Conversely, if your liabilities are greater than your assets, your net worth will be negative. You might calculate your net worth to quantify how you are doing financially, or to evaluate your financial progress over time.

For certain applications, however, this basic net worth calculation may not be adequate. If you hold copyrights, patents or other intellectual property (IP), you may need to calculate your “tangible” net worth, which is the sum of all your tangible assets minus the total amount of your liabilities. Businesses, for example, calculate tangible net worth to determine the liquidation value of the company if it were to cease operations and be sold. This figure can also be important to individuals who are applying for personal or small business loans, and where the lender demands a “real” net worth figure.

What Is Tangible Net Worth?

Your tangible net worth is similar to net worth in that it takes into consideration assets and liabilities, but your tangible net worth goes one step farther. It subtracts the value of any intangible assets, including goodwill, copyrights, patents and other intellectual property. The basic formula for calculating tangible net worth is:

Tangible Net Worth = Total Assets – Total Liabilities – Intangible Assets

Your lender may be interested in your tangible net worth because it provides a more accurate view of your real net worth, which is what the bank could expect to make if it had to liquidate your assets if you defaulted on their loan.

Tangible Versus Intangible Assets

The difference between net worth and tangible net worth calculations is that the former includes all assets, and the latter subtracts the assets that you cannot physically touch. Assets are everything that you own that can be converted into cash. By this definition, assets include cash, real property (land and permanent structures, such as homes, attached to the property), and personal property(everything else that you own such as cars, boats, furniture, and jewelry). These are your tangible assets since they are all things that you can hold.

Intangible assets, on the other hand, are assets you cannot hold. Goodwill, copyrights, patents, trademarks and intellectual property are all considered intangible assets since they cannot be seen or touched even though they are valuable. If you are selling your small business, you may be able to rightly argue that these intangible assets add value to the business. However, in the case of determining tangible net worth as part of the loan process, the bank may only consider those assets that are tangible because they could be more easily liquidated.

Valuation of Intangible Assets

Placing a value on intangible assets is tricky. The rise and subsequent fall of many dot-com companies in the late 1990s and early 2000s illustrates what can happen to companies that rely heavily on intangible assets. Ask Jeeves Inc.’s common stock, for example, sold around $180 per share in late 1999 and its market valuewas almost 200 times stockholders’ equity at that price. While the company’s balance sheet showed assets of $32 million (mostly cash, cash equivalents, and investments), the indicated market value was nearly $4 billion. This discrepancy between the balance sheet and indicated market value represented how investors valued Ask Jeeves’ intangible assets. However, 18 months later, Ask Jeeves shares sold for only about $1, with an indicated market value of a greatly-reduced $50 million, demonstrating that Ask Jeeves’ intangible assets had been incorrectly valued.

Today’s intangible asset valuation is a multi-step process. The valuation process may begin with the following considerations:

  • Purpose: Why is the asset being valued? (for example, financial reporting, bankruptcy/reorganization, litigation or transaction strategy)
  • Description: What is the asset?
  • Premise: How will the asset be used now and in the future?
  • Standard: Who will buy the asset?

The answers to these questions help determine the best methodology for valuation. For example, the transactional method looks at the price paid for similar intangible assets under similar conditions. Other methods include the income method, which analyzes projected cash flow, the economic life of the intangible assets and the discount rate. The replacement cost method estimates the cost of developing a similar intangible asset in the future. At times, multiple valuation methods may be used simultaneously to provide confirmation that the valuation is accurate.

Many individuals and businesses will consult with qualified professionals who specialize in intangible asset valuation to accurately determine the value of their trademarks, patents, copyrights, customer lists, and other intellectual property. The intangible asset valuation methods used by such professionals are appropriate for financial reporting requirements under U.S. generally accepted accounting principles (GAAP).

Calculating Your Tangible Net Worth

The formula for calculating your tangible net worth is fairly straightforward:

Tangible Net Worth = Total Assets – Total Liabilities – Intangible Assets

Your liabilities are relatively easy to quantify since they represent all of your outstanding debts, and you likely receive monthly statements or reminders for them. These statements are based on actual numbers – not estimates – and show exactly what you owe. The challenge is to correctly determine the value of your assets. To calculate your tangible net worth, you must first determine your total assets, total liabilities and the value of any intangible assets:

Total Assets
– Total Liabilities
– Total Intangible Assets
Tangible Net Worth

The Bottom Line

Your tangible net worth is equal to the value of all of your assets, minus any liabilities and intangible assets including copyrights, goodwill, intellectual property, patents, and trademarks. While a standard net worth calculation (assets – liabilities) will suffice for most individuals, those who hold intangible assets may be required to calculate their tangible net worth to satisfy a lender’s requirements for a personal or small business loan. As with any net worth calculation, placing accurate values on assets is critical. Many individuals and businesses prefer to solicit the advice of qualified professionals when valuing intangible assets. If you want to save some time, use Investopedia’s free Net Worth Tracker to calculate, analyze and record your net worth.

Assets That Increase Your Net Worth

Your net worth calculation provides a financial report card for how you are doing at this point in time.

Net worth is calculated by subtracting all of your liabilities (what you owe) from your total assets (what you own). If your assets exceed your liabilities you have a positive net worth. If your liabilities are greater than your assets, then you have a negative net worth. Keep in mind, your net worth fluctuates over your entire adult life, responding to changes in income and spending habits.

While it is helpful to calculate your net worth in order to figure out how you are doing financially today, your net worth is most beneficial when it is calculated and evaluated periodically over time. By noting changes in your net worth, you can see trends in your financial situation, be proactive about making better financial decisions and figure out what you need to do to reach your short-term and long-term financial goals. You can improve your net worth by increasing your assets, reducing your liabilities or a combination of the two.

A Quick Review

Net worth is the difference between your assets and liabilities, calculated as:

Net Worth = Total Assets – Total Liabilities

While your liabilities are easy to quantify (you probably receive a reminder each month that states the exact amount of money you owe to each creditor) it can be challenging to determine accurate values for some of your assets. It is best to make conservative estimates to avoid over-inflating your net worth (which may give you a false sense of financial security).

When in doubt, be honest and conservative in estimating the market value of any of your assets – including your home, vehicles, collectibles, furnishings and jewelry. Be realistic about the condition of your assets, and try to base these figures on what you could sell each asset for now, rather than:

  • How much you paid for it
  • How much you wish it were worth

While any asset can boost your net worth, several “large” assets are likely to have a greater positive effect on your bottom line.

Vacation Homes and Rental Properties

Vacation homes and rental properties may have a positive effect on your net worth. In many cases, these other-than-primary-residences are paid for outright with cash. For example, many people purchase condominium units as vacation homes. Condos are often paid for in cash because, firstly, they tend to be cheaper than single-family homes in the area, and secondly, the mortgage requirements are a lot more complicated and strict than for a single-family home.

Investments

Investments can be another major contributor to overall net worth. Although there are several different types of investments, some of the most common include stocks, bonds, mutual funds, ETFs and any other securities. The value of your investments in any tax-deferred retirement plans, such as 401(k)s, 403(b)s and IRAs (individual retirement accounts) can significantly increase your net worth. Most investments will fluctuate over time, so it is important to reflect these changes in your periodic net worth calculations. Note: taxes on these assets are contingent liabilities that should be included in the liability side of your net worth statement in order to provide a more realistic view of your financial situation.

Art and Other Collectibles

Art and other collectibles can add considerably to your net worth. The value of these assets, however, is often fickle and changes depending on current trends and the demand for such items. Because market values do change over time, and because we are often not aware of the value of certain collectibles – consider the many people who strike it rich on PBS’s “Antiques Roadshow,” bringing in garage sale finds to discover they are worth tens or hundreds of thousands of dollars – it may pay to seek out professional appraisals. In addition to having a good estimate for your net worth statement, you can also make sure the item is adequately insured against losses (your homeowner’s insurance policy may not cover art and other collectibles without a specific rider).

The Bottom Line

Your net worth statement is a highly personalized financial report card. It provides a picture of where you stand – financially speaking – at this point in time, and can help you make progress towards reaching your short-term and long-term financial goals.

Certain assets, such as homes, investments and art, may have the greatest impact on your overall net worth. When valuing any asset, it is important to determine fair market values – how much money you could make if you sold the item today – whether it’s a stock, your house or a piece of jewelry. Accurate values can provide you with a realistic net worth, which can help you make better financial decisions.

3 Steps to Identify Your Financial Goals

Every individual and family is different in terms of their expectations and aspirations for retirement. You may have been planning for years to finance a child or grandchild’s education, or to purchase your dream vacation home. But whatever you have in mind, in order to assess your own financial progress and plan for the future, you need to identify your financial goals.

The following steps will help pinpoint what you want your money to do for you tomorrow and what you need to do today to make it happen.

1. Ask Yourself What Really Matters

Financial goals stem from life goals, so ask yourself what matters the most to you personally. These questions are a good place to start:

  • What brings joy and purpose to your life?
  • Are there any concerns to be addressed?
  • What makes you feel in control, confident and peaceful?

Giving thought to these questions and discussing your answers with your team of trusted advisors will help them help you to zero in on your goals, understand the role your finances play in achieving them and develop a strategy for getting there.

2. Consider the Short and Long Terms

Balancing a mix of short and long-term goals is one of the main functions of a good financial plan. You may want to achieve debt-free status within the next two years, take an international vacation in the next five, and retire in the next 20. Additionally, if you have a family, caring for them is likely an important element of your plans for years to come. Establishing a timeline will enable you and your advisor to structure your investments and spending so that you achieve the short-term items on your list without compromising the ones that take longer-term planning.

3. Map Out Your Financial Past, Present and Future

The first step in painting a clear financial picture is gathering the important information about your money. From there, your advisor can help you chart a course that will help you get where you need and want to go financially. To chart a course for the future, you need to evaluate your financial past and present. At the Society of the FEW (Financially Empowered Women), we organize this information using three key documents we call The True Retirement Experience.

  • Past: Net Worth Statement . Your net worth statement captures the value of all of your assets, from your home and car to your bank and investment accounts. It also includes liabilities such as debt from loans or credit cards. The net worth statement reflects the financial value of everything that you have earned, saved and acquired up to this point.
  • Present: Income Statement . Your income statement lists all of your sources of income and your expenses on an annual basis. It provides a snapshot of the here and now to help you understand where your money is coming from and where it’s going. Coupled with the net worth statement, the income statement is the foundation for creating your financial plan.
  • Future: The Financial Plan . The third and final document is the most comprehensive and forward-looking: the financial plan. It’s a detailed financial plan developed with an advisor that compiles your past, present and goals into a roadmap for the future. In addition to managing your investments and developing a budget, your advisor can also use financial modeling to project for factors like inflation and “what if” situations. For example, “what if my child chooses to attend an expensive private college instead of a state school?” or “what if a market downturn happens the year before I plan to retire?” Examining cause and effect scenarios will likely illuminate both concerns and opportunities that you may not have considered before. With an eye toward the future, your advisor can help you prepare effectively for a range of financial challenges and goals.

The outcome of all this information gathering, reflecting and projecting is a financial plan that, when followed, will result in achieving the goals you set for you and your family. It affords you the peace of mind that comes with knowing you are financially on track without having to worry about whether the decisions you make now will negatively impact your future.

Why Knowing Your Net Worth Is Important

Your net worth is the amount by which your assets exceed your liabilities. In simple terms, net worth is the difference between what you own and what you owe . If your assets exceed your liabilities, you have a positive net worth. Conversely, if your liabilities are greater than your assets, you have a negative net worth.

Your net worth provides a snapshot of your financial situation at this point in time. If you calculate your net worth today, you will see the end result of everything you’ve earned and everything you’ve spent up until right now. While this figure is helpful – for example, it can provide a wake-up call if you are completely off track, or a “job-well-done” confirmation if you are doing well – tracking your net worth over time offers a more meaningful view of your finances.

When calculated periodically, your net worth can be viewed as a financial report card that allows you to evaluate your current financial health and can help you figure out what you need to do in order to reach your financial goals.

Net Worth = Assets – Liabilities

Your assets are anything of value that you own that can be converted into cash. Examples include investments, bank and brokerage accounts, retirement funds, real estate and personal property (vehicles, jewelry and collectibles) – and, of course, cash itself. Intangibles such as your personal network are sometimes considered assets as well.Your liabilities, on the other hand, represent your debts, such as loans, mortgages, credit card debt, medical bills and student loans. The difference between the total value of your assets and liabilities is your net worth.

One of the challenges in calculating your net worth is assigning accurate values to all of your assets. It’s important to make conservative estimates when placing value on certain assets in order to avoid inflating your net worth (i.e. having an unrealistic view of your wealth). Your home, for example, is probably your most valuable asset and can have a significant impact on your financial situation. Determining an accurate value of your home – by comparing it to similar homes in your area that have recently been sold or by consulting with a qualified real estate professional – can help you calculate a realistic net worth.

Notably, however, there is some debate about whether personal residences should be considered assets for the purpose of calculating net worth. Some financial experts believe that the equity in your home and the market value of your home should be considered assets, because these values can be converted to cash in the event of a sale.

That said, other experts feel that even if the homeowner did receive cash from the sale of the home, that cash would have to go toward the purchase or rental of another home. This essentially means that the cash received becomes a new liability — the cost of replacement housing. Of corse, if the home being sold has more value than the replacement residence, part of the former home’s value can be considered an asset.

Why Your Net Worth Is Important

When you see financial trends in black and white on your net worth statements, you are forced to confront the realities of where you stand financially. Reviewing your net worth statements over time can help you determine 1) where you are, and 2) how to get where you want to be. This can give you encouragement when you are heading in the right direction (i.e. reducing debt while increasing assets) and provide a wake-up call if you are not on track. Getting on track requires you some fo the following below:

Spend Wisely

Knowing your net worth is important because it can help you identify areas where you spend too much money. Just because you can afford something doesn’t mean you have to buy it. To keep debt from accumulating unnecessarily, consider if something is a need or a want before you make a purchase. To reduce unnecessary spending and debt, your needs should represent the majority of spending. (Keep in mind that you can falsely rationalize a want as a need. That pair of shoes does fulfill a need for footwear, but a less expensive pair may do just fine and keep you headed in the right financial direction).

Pay Down Debt

Reviewing your assets and liabilities can help you develop a plan for paying down debt. For instance, you might be earning 1% interest in a money market accountwhile paying off credit card debt at 12% interest. You may find that using the cash to pay off the credit card debt makes sense in the long run. When in doubt, crunch the numbers to see if it makes financial sense to pay down a certain debt, taking into consideration the impact of no longer having access to that cash (which you might need for emergencies).

Powerful Actions To Restore Public Trust And Confidence In The Global Economy

Building Stronger Governance

A recent IFAC study reveals that strong professional accountancy is positively correlated to better results in tackling global corruption. Further, the impact of an accountant’s work is enhanced when they operate in nations with strong governance architectures. The following recommendations will foster greater collaboration across sectors — we need government and business entities working together to restore public trust and confidence in the global economy.

  • Work together to tackle corruption.

Global corruption won’t disappear overnight. The need to fight it requires G20 countries to collaborate across public and private sectors. Economies need greater engagement between global regulatory and policy bodies, improved government and public sector financial management using accrual-based reporting, and strengthening guidelines on whistleblower protection.

Fostering Growth Through An Effective Global Economic Environment

Regaining public trust and confidence in the global economy will be an ongoing objective. To get there will require creating a transparent economic environment that facilitates growth, whether for small businesses or large entities. To foster an environment conducive to growth, government and business leaders in G20 countries need to:

  • Establish an inclusive environment for small and mid-sized entities.

Small and medium-sized entities (SMEs) are the backbone of the global economy, but they need to operate in an inclusive environment that offers the right growth opportunities. G20 countries can do this by investing in the right digital infrastructure that grants SMEs access to the digital economy and implementing financial inclusion policies that foster SME productivity.

  • Collaborate for a clear international tax system.

There is a real concern among G20 citizens about the consistency in their tax policies. In fact, we found that three-quarters of people in G20 countries want governments to collaborate with each other to create consistent tax policies. The implementation of OECD Base Erosion and Profit Shifting (BEPS) to prevent tax avoidance is a good step towards achieving international consistency.

  • Make regulation smarter and more effective.

We don’t need to pile on new regulation after new regulation to fix the problem. What we need are consistent and comprehensive standards that lead to quality regulation — they should be clear, evidence-based, collaborative, transparent and consistent across jurisdictions.

  • Create a consistent, transparent global regulatory environment.

To improve transparency and consistency of regulations and standards, we need a formal system set up by the Financial Stability Board (FSB) that invites constant communication between national regulators, helping drive forward international regulation development.

  • Implement internationally-accepted standards.

High-quality internationally-accepted standards are key to a stable and growing global economy. G20 countries must support global adoption to achieve confidence and a healthy global financial system.

As the global environment continues to evolve, so should the standards and regulations that govern it. It will take a solid commitment from professionals and businesses, starting with members of G20 countries, to work together to achieve a healthy and sustainable global economy.