A net worth statement demonstrates the current financial situation of a business. Being a useful tool to measure the financial progress of a firm on a yearly basis, net worth calculates the difference of total assets minus total liabilities. Businesses that track their progress and see their net worth increasing from year to year are able to meet their obligations and are financially strong.
A net worth statement demonstrates also the current financial situation of a household. Tracking the financial progress from year to year, it helps people plan for their financial future before it is, possibly, too late, to take appropriate measures.
Developing a net worth statement is pretty straightforward.
The first thing to do is listing all the assets on the left-hand column of the Net Worth Worksheet that can be downloaded anywhere on the Internet.
In the financial terminology, assets are all items that can be converted to cash. Under this category fall:
(a) Liquid Assets: cash on hand; cash in checking accounts; cash in saving accounts; money market accounts; Certificates of Deposit (CDs)
(b) Long-Term Assets: stocks; bonds; mutual funds; annuities; cash value of life insurance; cash value of real estate insurance; current value of 401k or 403b accounts; current value of IRA
(c) Property Assets: market value of home; value of household items (furniture, art, antiques, collectibles, jewelry); market value of other real estate property; market value of vehicles (cars, boats)
Not all assets have to be listed, provided that are worth at least $500 or more.
The sum of all listed assets represents total assets.
Liabilities are listed on the right-hand column of the Net Worth Worksheet.
In the financial terminology, liabilities are obligations that individuals or companies are legally obligated to settle. Under this category fall:
Mortgages; home equity loans; other real estate loans; car loans or lease; credit card balances; bank loans; student loans; 401k hardship loan; personal loans; life insurance loans; cash advances; delinquent taxes; child support; medical bills; other liabilities.
The sum of all listed liabilities represents total liabilities.
To calculate current net worth, total liabilities are subtracted from total assets. If the number is positive, assets are more than liabilities, which means that the household is building wealth. However, even if the number is negative, still constructing a net worth statement is the groundwork for having something to compare against in the future.
Some major considerations
– Net worth statement should be constructed at least once a year. In that way, the household keeps track of the yearly progress, but most importantly has adequate time to take appropriate measures and improve its financial situation.
– Estimates of assets should be conservative, particularly those concerning property values. If values do not represent the real picture of the net worth, net worth statement won’t be accurate and financial plan will fail.