Would you like to gain some insight into your current financial situation? A simple listing of the property you own, assets, and the debts you owe, liabilities, can provide you that insight. Such a listing is called a net worth statement, or sometimes 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 these assets and debts on a given date. It is a snapshot in time, and by comparing net worth statements made at the end of each year over several years can help you measure the progress toward your financial goals and situation. Additionally, the net worth statement is a good measure of your ability to pay off current debts, or debts do within the year.
Developing the Statement
Most net worth statements are done December 31 or January 1 because this is the end of the calendar year and it is much easier to compare year over year snap shots if it is done at same time in the year. However, it is possible to develop a statement at any date and as often as needed. Assets are generally listed on the left-hand side and liabilities on the right-hand side.
Listing Assets
You want to start by listing your largest assets. For most of us this would be our home and then vehicles. You also want to list your more liquid assets like checking accounts and savings accounts. Additionally, gather statements and list any certificate of deposits, investments, and retirement accounts. Now 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 that are worth $500 or more. Now, take all of the assets you have listed and add them together. This number represents your total assets.
If you obtain your current checking account balance from your bank, remember to subtract the value of any checks that are still outstanding. Keep in mind that the key 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 may look good on paper, but may not paint an accurate picture of your net worth.
Listing Liabilities
Liabilities are generally listed on the right-hand side of the net worth statement and include all debts and obligations to pay. And again, start with the major outstanding liabilities such as the balance on your mortgage or vehicles loans and list those. 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.
Net Worth
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 to have something to compare against in the future. Now you want to repeat this process once a year and compare it with the previous year’s number. You will be able to see if your progress towards your goals.
Your net worth can be a useful tool to measure your financial progress from year to year. Your net worth is essentially a grand total of all your assets minus your liabilities. There is no magic net worth number, but you should use your net worth to track your progress from year to year, and hopefully see it improve.
Article by Wil G.
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