The Oxford Language Dictionary defines Net Worth as:
“The total wealth of an individual, company, or household, taking account of all financial assets and liabilities.”
In plain English: What you have minus what you owe!
The written representative form of Net Worth is called a Net Worth Statement.
A Net Worth Statement is a financial tool that shows your financial position at a given point in time. It is like a “financial snapshot” that shows the dollar value of what you own (assets) and what you owe (liabilities or debts). This formula for calculating net worth is Assets – Liabilities = Net Worth.
This is the point where things start getting a little fuzzy. There is variance in what is and is not included on a net worth statement.
Some planners feel every asset and every debt should be included in a Net Worth Statement to get the clearest picture of net worth.
Other planners feel “Use” assets (home, autos, furniture, jewelry, etc.) should not be included in the Net Worth Statement. The reasoning behind this is that everyone needs a house, an automobile, and furniture. Personally, I feel the equity in any asset should be included in the net worth statement to get the clearest picture of Net Worth. The cash value of life insurance policies should also be added to the asset side of the statement.
The estimated value of a home is added to the asset column, while the debt owed is added to the liability column. The estimated value of automobiles is placed in the asset column, while the remaining note on the automobiles is placed in the debt column. The same process is used for all assets and all associated debts.
Some planners feel that short-term debt (any debt that will be resolved within 12 months) should not be included on the liability side of the net worth statement, while some planners feel all debt (both short-term and long-term debt) should be included.
For retirement planning purposes it is not critically important if some Use assets are not included. I think it is much more important to set a format for your own net worth statement and use the same format for future statements.
The idea is to have a starting point, and future periodic Net Worth updates that measure progress. This is best accomplished if the format remains fixed.
A more formal and fixed format may be necessary if a Net Worth Statement is required for large commercial loans or real estate loans. Lenders may require that the net worth statement be formatted in a particular manner. If this is true, the information required and the necessary format will be indicated by the lender.
What assets are included?
Assets that would normally be included in a net worth statement should include: Bank Statement balances (both Checking and Savings accounts), All investment and brokerage accounts, and all retirement accounts (IRAs, Roth IRAs, 401Ks, etc.) Use assets (estimated value of home, autos, furniture, jewelry), and cash value of any life insurance contracts. The estimated value of any real estate owned (either as raw land or investment properties in addition to the personal home) should also be included.
What debts are included?
Types of debt to be included in the liability section of a net worth statement include student loan debt, credit card debt, auto loans debt, home loan debt, other consumer debt, unpaid medical bills, unpaid taxes, and any other commercial or real estate debt owed personally.
It must be clear by now that the idea is to include all assets and all debt!
There are multiple Net Worth Statement templates and examples online. Again, the idea is to pick one that works in your hands and stay with it. This can mean a paper Net Worth Statement downloaded and printed, a self-generated spreadsheet, an online spreadsheet, or an online Net Worth Statement.
The easiest and most practical is an online Net Worth spreadsheet that is pre-formatted, can be copied, and can accept multiple Net Worth Statements on different dates.
This is an example of a simple Net Worth Statement with fictitious dollar amounts applied: (Note that unused asset headings are left blank.)
NET WORTH SAMPLE WORKSHEET
Assets
| Savings Account | $ 1,500.00 |
| Checking Account | $ 1,000.00 |
| Investments | $ 165,000.00 |
| Life Insurance Policy | $ |
| Pension Equity | $ |
| Profit Sharing Equity | $ 45,000.00 |
| Employer Savings Plan | $ |
| Retirement Fund | $ 15,000.00 |
| Personal Property | $ |
| Real Estate (Including Home) | $ 325,000.00 |
| Other (Auto) | $ 25,000.00 |
TOTAL ASSETS | $ 577,500.00 |
Liabilities
| Credit Card Bills | $ 6,000.00 |
| Unpaid Medical and Dental Bills | $ 1,500.00 |
| Mortgage Balance | $ 425,000.00 |
| Home Equity Loans | $ |
| Personal Loans | $ |
| Car Loans | $ 18,500.00 |
| Unpaid Taxes | $ 6,500.00 |
| Other | $ |
TOTAL LIABILITIES | $ 457,500.00 |
(Net Worth = Total Assets – Total Liabilities)
| TOTAL ASSETS | $ 577,500.00 |
| MINUS TOTAL LIABILITIES | $ 457,500.00 |
NET WORTH | $ 120,000.00 |
All assets are added together. All debts are added together. Then the liabilities are subtracted from the assets to get the Net Worth. In this example the Net Worth indicated is $ 120,000.00. (It is necessary to note that after everything is added together and liabilities are subtracted from assets that in some cases Net Worth can be a negative number.
Obviously, this is not the scenario that one desires. But, with younger people who may have student debt, car loans, and home debt the Net Worth Statement may easily reflect a negative number for several years.
The object of the game is to have the positive Net Worth number increase each year, or have the negative Net Worth number decrease each year. This indicates a positive movement towards financial independence.
As previously stated in my post titled: QUITTING WORK- WHAT’S YOUR NUMBER ?
The Net Worth Statement is generally regarded as the most important single piece of information used in the retirement planning process.
Find a desirable template or spreadsheet online and formulate your own Net Worth Statement. Once your complete this step you will have a small part of the ENOUGH puzzle completed and are one step closer to ENOUGH.
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