This useful “big picture” tool shows your current overall financial position. It is like a “financial snapshot” that shows the difference between your total assets (what you own) and your total liabilities (what you owe). This relationship can be stated as:
Assets – Liabilities = Net Worth
Net worth is the dollar amount you would have if all assets were sold today for current market value and all debts were paid in full. For example, if your assets have a current financial value of $28,000 today and you currently owe $8,000 in credit card balances, loans, and other debts, your net worth TODAY is $20,000 ($28,000 assets – $8000 debts).
For many families, this is a ‘once a year’ statement, and can be completed using the end of year statements from financial institutions, credit card companies and retirement accounts.
Assets. Determine the financial value of what you own and list each asset and its current value. This value must be expressed in “current market value” (in other words, what the asset would be worth if sold today to a willing buyer).
If recently purchased, the purchase price of your house or other real property can be used. For personal possessions such as vehicles, household goods, clothing, and recreational equipment, the value is more difficult to determine. Most of these items lose financial value from the day of purchase. However, if recently acquired, the purchase price could be used. For vehicles, look at the Official Kelley Blue Book .
For whole life insurance, list only “cash value” policies or what you could borrow from the policy today. Term insurance carries no cash value. The financial value of cash and other liquid assets like bank accounts is determined by getting the current balance for checking and savings accounts.
Liabilities. Determine the dollar value of your debts (what you owe). For mortgages, list the balance due. Also list unpaid bills such as income and property taxes you currently owe or other unpaid bills. List the amount you owe on current loans like car and education loans. List how much you owe on each of your credit cards.
Now, subtract the total of the liabilities from the total assets you’ve listed. This will give you your current net worth.
What does the net worth statement mean?
If liabilities exceed the value of assets (negative net worth), corrective action needs to be taken. However, even a person with a high net worth may have financial difficulties. Having assets with low ability to convert to cash may mean not having adequate cash available to pay current expenses if income suddenly decreases.
For most people, financial security is built slowly over time. Your net worth statement, completed just once yearly, can provide much information about your financial picture. It can be a simple listing of what assets you own and what bills you are working on paying down. It can help in creating goals for the upcoming year. It can also help you in reversing the trend if too much of your income is tied up in paying off loans or credit cards.
Begin 2017 with a net worth statement….and set your goals in place!