Your Net Worth Statement Strips Away Your Financial Fantasies
There is a reason your net worth statement is considered by many financial advisers to be the most important financial document to create. At its core, your net worth statement provides an unfiltered understanding of your finances, showing the reality of your financial situation instead of the fantasy many of us have created.
Math Beats Fiction
Your net worth statement lists off everything you own and everything you owe. Then, it takes your assets (what you own) and subtracts your liabilities (what you owe) to get your net worth: the mathematical calculation of how much wealth you've built.
And that is the advantage of the net worth statement, math doesn't lie. Updating your net worth statement regularly can help to ground you in reality and keep you from making common fallacies about personal finances.
Tear Down The Fantasy and Rebuild Reality
One of the first steps in building wealth is to disabuse ourselves of the fantasies that keep us from building any real wealth. Use your net worth statement to take an honest look at your finances and how these fantasies are keeping you from building wealth.
Keeping Up With The Joneses
Often, we compare ourselves to our neighbors and wish we had what we think they have. This type of thinking drives many into debt and even depression. Being content and happy with your life, however, can never begin by looking at what others have. It starts with looking at what you have and appreciating where you currently are.
Because your net worth statement allows you to see all of your assets in one place, it is easier to appreciate the successes you've had and feel good about the sacrifices you've made to achieve that success. Having one place to look at all the wealth, investments, and assets you've accumulated can help you feel comfortable with where you are, regardless of what the neighbors have.
Faking Wealth With Debt
Many fake wealth by going into debt to afford all the shiny things we think will make us happy. We might create an image of wealth around us by buying expensive things and justifying our ability to afford them with the phrase "I can afford the payment."
Unfortunately, affording the debt payment doesn't mean you have wealth, and it definitely doesn't help you build wealth. Your net worth statement will make it very obvious how much of your 'wealth' is financed through debt. It will also provide you with a clear understanding of how much wealth you actually have, or if you owe more than you own.
Feeling Like Paying Down Debt is Getting You Nowhere
When you finally become focused on paying down unnecessary debt, you may start to feel like making payments toward debt isn't making a dent. It can be very discouraging to continually make extra payments to your loans, while your savings and checking account balances stay consistently low.
Your net worth statement can provide you with some much-needed motivation to keep on the debt repayment road. While it is true while paying off debt your assets will stay where they currently are, your liabilities will be continually dropping. As your debt shrinks, your net worth will continually grow.
It can be extremely motivating to see the true measure of your wealth, your net worth, marching ever upward as you pay off your loans.
One Spouse in Reality and One in Fantasyland
One of the most damaging dynamics in a marriage or any relationship is when one partner knows everything about the finances and the other knows very little. This often happens in otherwise strong marriages when one spouse takes on the financial duties simply out of service to the family. In less-healthy marriages, this can also occur due to one spouse not being responsible nor caring about the finances or due to a controlling spouse using money as a control tool.
Whether the cause is rooted in love or something else, this dynamic is dangerous for a marriage. The creation of a net worth statement will help to get both spouses on an even financial footing.
The net worth statement can also solve one of the most common arguments couples have when they are in debt. Often, spouses in debt blame each other for the family financial condition, pointing to the debt the other incurred to purchase things they wanted. By seeing all of the marital assets and liabilities in one place, both spouses can better understand how their individual actions contribute or hurt the effort of building family wealth.
In just a few minutes a week, you can achieve your financial goals. Each week you will receive a simple action item to take to improve your financial situation. Visit our challenge page and commit to getting in the best financial shape of your life.