If you would like to gain some insight into your current financial situation creating a net worth statement may be for you. It’s a listing of the property you own, assets, and the debts you owe, liabilities, can provide you that insight. Sometimes it’s called a balance sheet and is based on the following:
Assets = liabilities + net worth, or assets – debts = net worth
The net worth statement is like a photograph of assets and debts on a given date. Comparing net worth statements made over several years can help you measure the progress toward your financial goals and financial situation. Additionally, the net worth statement is a good measure of your ability to pay off current debts, or debts due within the year.
Developing the Net Worth Statement
Most net worth statements are created at the end or beginning of the year which makes them easier to compare year over year. However, it is possible to develop a statement at any date and as often as needed.
Generally listed on the left-hand side of the balance sheet, you want to start by listing your largest assets which for most of us this would be our home and then vehicles. And you also want to list your more liquid assets like checking and savings accounts. Additionally, gather statements and list any investments and retirement accounts. Also, consider personal items that may be of value. This could include jewelry, coin collections, musical instruments, etc. You don’t need to itemize everything, but list items worth $500 or more. Now, add all of items listed together. This number represents your total assets.
If you obtain your current checking account balance, remember to subtract the value of anything still outstanding. Keep in mind that the key to correctly listing current assets is to accurately estimate the value of items. Therefore, be conservative with estimates, especially with home and vehicle values. Inflating the value of large assets is easy to do and will not paint an accurate picture of your net worth.
Liabilities are generally listed on the right-hand side of the net worth statement and include all debts and obligations to pay. Start with the major outstanding liabilities such as the balance on your mortgage or vehicles loans. Next, list all of your personal liabilities such as credit cards, student loans, or any other debt you may owe. Now you want to add up all of your liabilities to come up with a total.
Your Net Worth Statement
Once you have your total assets and total liabilities, subtract the total liabilities from the total assets and you will have your net worth. It doesn’t matter how big, how small, or even if it is negative. This is just a starting point. You will want to file it so you will have something to compare against in the future. Now you want to repeat this process, during the same period once a year, and compare it with the previous year’s number.
Your net worth statement can be a useful tool to measure your financial progress from year to year. There is no magic net worth number, but you should use your net worth to track your progress from year to year, and see it improve. In my next post, I will address some net worth concerns and how you can improve on them. I am a financial counselor. Contact me here if I can assist you with creating a net worth statement.