Do you know your net worth? Your net worth statement is a snapshot of your financial health. Like a company balance sheet, a net worth statement lists all your assets and liabilities, giving you a single number that represents your financial situation at that moment in time.
What Does Your Net Worth Tell You?
The good thing about a net worth statement is that it gives you an idea of how your wealth or debts are distributed. This information is useful in creating a financial plan or understanding more about your financial health. But your net worth statement doesn’t reflect everything about your financial situation. It’s important to look at other factors such as your cash flow, debt, employment situation, and more. We’ll cover some more of these topics in later articles.
What is in a Net Worth Statement?
The goal of a net worth statement is to accurately list all of your major assets and debts and create a personal balance statement, much like you would if you were looking at a company’s books. Before you get too far into it, we should clarify which assets to list. We are only interested in assets that have cash value or can be easily converted to cash. So you would include savings accounts, retirement accounts, investments, real estate*, valuable personal property, and similar items. You wouldn’t include items such as your clothing, furniture, DVD collection, video games, etc.
*Should you include cars and houses in net worth statements? Some people prefer to include major items such as their primary residence or cars, while others prefer not to include these items. You can choose to create your net worth statement however you wish – just make sure that you are consistent in your measurements if you are tracking your net worth over time.
How to Create a Net Worth Statement
Start with a master account list. The first thing you need to create your net worth statement is an accurate list of all your financial accounts and how much money is associated with each account. Hopefully you have a master account list, which will help you know where your money is located and how to access it. Next, we list everything and add it up.
Net Worth = Assets – Liabilities
List your assets. Now that we know what we are looking for, we need to go through our master financial account list and add up all assets from the accounts on the list. You can record them on a sheet of paper, on a spreadsheet, or by using your favorite financial management program.
Next, do the same with your liabilities. Then we will add up all your assets and subtract your total liabilities from your assets. This will give us our net worth. A positive value means you have a positive net worth, and a negative value means you have some work to do.
Tracking Net Worth Over Time
As we mentioned earlier, a net worth statement is simply a snapshot in time, and it changes as you earn money, spend money, investment values increase or decrease, you repay debt, etc. Tracking your net worth can be a good way to visualize how the total value of your accounts has changed over time.
This can easily be tracked in a simple spreadsheet or with a money management software program such as Quicken, or one of the many free online money programs.
My current favorite free money management app is Personal Capital, which combines the power of Quicken with the online capabilities of Mint.com. See how Mint.com compares to Personal Capital.
Using Net Worth as a Tool to Understand Financial Health
Your net worth is an important number, but be careful not to place too much emphasis on it because there can be more important factors affecting your financial health. Your net worth is simply a tool that can be useful when it is used in conjunction with other financial tools, such as a cash flow statement, debt analysis, and a financial risk test (all of which will be covered in future articles). We will use these tools to help you gather a more complete picture of your financial health and hopefully help you apply these principles to find areas for improvement in your financial situation.