Wealth is often confused with a large annual income. Your annual income can give you a misplaced complacency about your financial situation. A true measure of your wealth is the value of everything you own after you account for all liabilities, real and potential.
In financial circles, the term "net worth" is used when referring to an individual's wealth. Being clear about what makes up your net worth is the first step in making informed decisions about managing and protecting what you own.
The most telling aspect of individual wealth is ownership of non-liquid assets such as homeowner's equity, retirement accounts, investments, and art work. A professional in private practice also owns business equity. For purposes of definition, we can refer to these items as "capital assets."
At any given point in time, consumable items you own contribute relatively little to your net worth. In the short term consumption prevents you from saving, and in the long run it is a drag on your ability to accumulate wealth.
Risk is the likelihood that a loss will occur. Considerations of risk are most likely to come up in discussions about buying stocks when in reality it is one of the least risky activities that we undertake. It is much better to have a broader view of risk since it affects all aspects of your life including when and how to drive your car. Setbacks can take the form of losses from fire, theft, professional liability, a business investment turned sour and disability.
The most common ways of dealing with the potential for loss are insurance policies and incorporating business enterprises. Financial planning techniques allow you to maintain some manner of control over your assets in certain circumstances.
When it comes to investments, the key is to determine the level of risk that you are in a position to tolerate.
Since you cannot totally avoid risk, managing it should be an integral part of the decision-making process in both your personal and professional life.
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If you want to shelter your assets from potential liability due to your activities, whether personal or professional, then you must investigate the planning options available to you. Scrambling when a loss is imminent puts you at a disadvantage because your ability to make sound decisions will be clouded and your options might be limited.
The focus of estate planning is usually how you will maintain control over your assets or at least have a say in their disposition in the event of death or mental incapacity. Most planning techniques involve a change of ownership or a “transfer,” either in the present or in the future. And they all carry tax consequences.
There are state laws that dictate what happens if you die without a formal and valid plan. For instance, this may mean that your spouse gets one third of your estate and the children get the rest. The default rules can have harsh consequences. They do not take into account estranged spouses who are not divorced. The rules do not provide for who gets the art work versus who gets the stocks and bonds. And no special consideration is given to the most needy or deserving heir.
A good starting point for estate planning is who your loved ones are and how your capital assets will ultimately be distributed among them.
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