A net worth statement is a great way to get an overall picture of your financial situation. A net worth statement can give you an overall idea of how much money and other assets you have, as well as list all your debts and other obligations. Let’s take a look at what a net worth statement is, how to create one, and how you can use it to better understand your financial health.
How To Calculate Your Net Worth
What is a net worth statement?
A net worth statement is essentially a basic accounting of all of your known assets (also called your gross value), minus any of your liabilities (which would constitute your net worth). The statement is a specialized financial tool that helps you identify your present financial situation, by removing all that you owe from everything you have. Such information, when evaluated regularly, can help track your financial progress.
Why a net worth statement is important
A net worth statement can help you visualize all your assets and liabilities in one place, to give you a good idea of how much money and other assets you have, as well as visualize all of your debts. This information is helpful whenever you need to make an important financial decision, such as deciding whether or not you can afford retirement, whether or not you should make a big ticket purchase, or other significant financial decisions. A net worth statement can also be used as a tool to help you eliminate debt or reach other financial goals, as you can visualize your progress as you go.
How to create a net worth statement
Determine which information to include. Let’s go back to the construction of the net worth statement itself. First,you should decide what to include in your calculations. Many people recommend only including liquid assets such as cash and investments, and big ticket items such as your house, cars, artwork, jewelry, and anything else you might be able to sell if necessary. You normally wouldn’t including items such as clothing, furniture, and other items you use for daily life.
The reason for this distinction may be clearer when you consider the complications that could arise from trying to appraise everything you own, particularly those items that may not have an applicable resale value. You may end up overestimating your net worth as a result. You really need to think this through and take the time to reasonably prioritize your assets.
Use realistic valuation. You should include the actual resale values of any items on your statement. For automobiles and other vehicles, you should probably go with a standard guide like Kelley Blue Book. (Of course, don’t discount the local market value either.) Use good sense and do some price research for each of these types of times.
List all assets and debts. Next, you want to gather all your financial information and list it on paper – using a two column sheet makes this easier – one for assets and one for liabilities. Add up all of your assets, then do the same with your liabilities. Once you are done, you subtract your liabilities from your assets:
Net worth = assets – liabilities
It is possible to have a positive or negative net worth.
How often should you do a net worth statement?
Many financial advisors suggest that people should conduct net worth statement at least once a year so it can be compared to previous years. You can do this any time of the year, but a good time to do it is when you’re fiddling with all of that financial information at tax time. You might consider creating a net worth statement more frequently if you are an active trader or investor, or if you are going through many financial changes, such as making new investments, paying of debts, opening or closing financial accounts, any time your see a major change in income or loans, or if you expect to see any significant changes to your net worth.