The Statement of Your Wealth
A net worth statement is one of the key documents you’ll need in planning your finances and achieving your goals. Your net worth statement is used to track your overall wealth, but there are far more uses of your net worth statement. With just a few minutes and some simple math, you can create your own basic net worth statement.
Creating your net worth statement might seem like an intimidating task, but for most people it’s actually relatively simple. All a net worth statement does is list off your assets, your liabilities, and then subtracts the liabilities from the assets. Grab a paper and a calculator, or open up Excel, and you’ll be ready to calculate your net worth.
Assets are everything you own which has monetary value, and which you can turn into cash. These include financial accounts, physical assets like your home and your car, and even personal property like furniture and electronics. If you can turn it into cash, you can list it as an asset.
To create the assets section, start by creating subsections for liquid financial accounts, restricted financial accounts, large physical assets, and personal property. For each asset you own, you’ll also need to identify their cash value.
Valuing most of your assets will be very simple because each month you get an account statement with the value listed. For physical assets like your home and car, you’ll can find the values by going to trusted websites, like real estate websites and Kelly Blue Book. Personal property and other assets can be valued using E-Bay, or by contacting an expert appraiser if the asset is worth enough.
Identify Liquid Assets
Your liquid assets can be easily and quickly turned into cash for full value. This is a short list of assets including your checking accounts, savings accounts, and even the cash value of a life insurance policy. Normal investment accounts would also be included, but the value in your retirement accounts won’t because you have to pay a hefty penalty to get access to the cash. For this same reason CDs and other restricted accounts are also excluded.
Understanding the value of your liquid assets is extremely important as these are the major sources of funds for emergencies and debt repayment. Having sufficient liquid assets will allow your family to deal with many problems such as surprise bills, medical emergencies, and job losses. The larger your liquid assets are, the more secure your family is if a negative life event were to occur.
After you’ve listed all your assets, add up the value of all your assets and enter the number in your total assets line in big bold numbers. For many, you’ll be surprised how large this number is. But remember, your assets are only half the net worth equation, now we have to deal with your debt.
Your liabilities are everything you owe, regardless of why you owe it or two whom you owe it. This is usually the most depressing part of the net worth statement to create. The liabilities section provides significant insight into how you spend your money, and is one of the major reasons why you need a net worth statement.
To fill out the liabilities section, you’ll need the total balance of what you owe and the interest rate expressed as an Annualized Percentage Rate (APR). For most of your liabilities, you can get all you need by simply looking at your monthly account statement.
For each liability, write down a name for the debt, the amount you owe, and the APR. Then, multiply the amount you owe by the APR. This is the amount of money you spend every year on interest. Write that number next to each debt to give you an understanding of the true cost of each debt.
Identify Asset Connections
For each debt, identify the assets you’ve acquired as a result of the debt. Link your mortgage to the home your family lives in and link your car loan to the family car. Understanding how your debt was incurred, and what you bought with it will help you analyze your spending habits and how you use debt in your life. Student loans may not be linked to an asset on the net worth statement, but it’s important to make an note that your income is linked to this debt.
Your credit card debt is obviously linked to a long list of personal property, lots of which you probably don’t use anymore. Seeing how much money you spend each year paying interest on unused personal property items should be great motivation to avoid making purchases you can’t afford.
Also look at the relationship between the asset’s value and the debt balance. For some assets, like a home, you will see the value of the asset increasing while the value of the liability decreases. Owning the asset, even with the associated debt, is ultimately increasing your net worth. Other assets, like cars, boats, and big screen TVs are going down in value every year, often faster than the loan balance decreases. These assets and associated loans are dragging down your net worth over time.
Carefully consider the relationship between the asset and the liability before making any major purchase decisions using debt.
After you’ve listed all your liabilities, add up the balances of all your debt and enter the number in your total liabilities line in big bold numbers. With this information you can now quickly calculate your net worth.
Before you do, however, it is also a good idea to add up the total amount you spend on interest each year. Remember, not all of that interest is bad, such as the amount you pay for your mortgage, but seeing the cost of your loans as a total annual expense can provide more motivation to better manage debt.
Your Net Worth
The final step is quite easy: simply subtract your total liabilities from your total assets. The remaining number is your total net worth. It is also the foundation of the inheritance you will leave to your family.
Your net worth shouldn’t be a ‘one and done’ exercise. Updating your net worth regularly will help you better understand your financial situation, provide insights you can use to manage your money, and help you track your wealth creation over time.
I recommend updating four times a year; every three months. Set net worth milestones for yourself and follow your progress towards each milestone. Tracking your net worth in this manner will help keep you motivated and inform you of the milestones you’ve accomplished.
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 financial challenge page and commit to building your financial plan one week at a time.
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career provides him with a unique insight on personal financial, having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at firstname.lastname@example.org