What is Net Worth?
It also is critical to look at your overall financial situation to determine if you are getting ahead from one year to the next. A “net worth statement” helps you determine “where you stand” and serves as a measure of your overall financial position.The net worth statement is a summary of your financial position at a particular point in time (on a given date). It is a list of all your financial assets (what you own) and all of your financial liabilities (the debts that you owe). Net worth is the dollar amount you have when you subtract everything you OWE from everything you OWN.
You will need this information when you:
- borrow money;
- apply for a home mortgage;
- determine insurance needs;
- plan your retirement;
- write your will and determine estate planning needs in the event of death, divorce, or remarriage;
- settle a divorce.
What Are Your Assets?
Assets are any financial or material possessions that have monetary value. On the net worth statement the value is listed at the current market value, not what you paid for it. Assets include things such as:
- Cash on hand or in savings accounts (including certificates of deposit or checking accounts)
- Stocks, bonds, mutual funds
- Cash (not face) value of life insurance
- Money others owe to you
- Annuities, retirement plans
- Employee benefits such as company stocks
- Your home
- Other real estate and business interests
- Automobiles, trucks, other vehicles
- Household furnishings, antiques, jewelry, books, coins, artworks, etc.
What Are Your Liabilities?
Liabilities are the financial obligations or debts you owe to other persons or institutions. Included are:
- Installment loans (cash advances, auto, etc.)
- Department store and credit card debts
- Taxes owed
- Unpaid bills (medical, utilities, etc.)
- Any other liabilities
Figure Your Net Worth
Total your assets and your liabilities. Subtract the liabilities from the assets. The result is your financial net worth.
Now that you have taken the time to calculate your net worth, how do you feel about your financial situation? Happy? Relieved? Discouraged?
If you are a bit discouraged, do realize that a negative net worth statement may easily happen to someone just starting out on their own or to young families. Just as a photograph shows how you looked at one specific time, so too, the net worth statement reflects your financial situation at only one point in time. It should be updated at least once a year or as your financial situation changes.
If you are not satisfied with your net worth and want it to grow, develop a plan to increase it. More income, lower living expenses, and/or more investment growth are some alternatives.
To increase your savings you may have to cut spending in some areas. Also, make sure that your savings and investments are yielding the best financial return for your situation. You may want to reduce your present debt level by making regular payments and not adding any other debts. These are more specific examples that may result in increasing your net worth.
If you are like most people, your overall goal will be to increase your net worth each year. Developing a financial plan means taking control of what you have now and disciplining yourself to manage your money to reach these goals you have set for yourself and your family.
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What is Net Worth?
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