The Basics: Your Net Worth

The Net Worth Statement is a statement of your personal financial position at a given point in time. It is often referred to a snapshot because it gives you a fairly clear picture of your financial position at that moment by analyzing your assets less your liabilities. The statement does not reveal how your personal financial position became what it is nor does it determine where it will be in the future. For this information, you need to prepare and review your income and expense statement for past financial information and budget statement for future expectations.

The Net Worth Statement is generally divided into three items: assets, liabilities and net worth.

Assets. Assets are generally divided into two groups — short-term assets and long-term assets. They are usually presented in order of liquidity, with short-term assets (cash and marketable securities) appearing first followed by long-term assets. Here is an illustration of the asset side of the Net Worth Statement:

Cash: $
Cash on Hand
Checking Accounts
Savings Accounts
Certificates of Deposit
Loans/Accounts Receivable
Investments:
Money Market Accounts
Stocks
Mutual Funds
Bonds
IRA/Retirement Funds
Other
Real Estate:
Personal Residence
Other
Personal Property:
Automobiles
Furniture
Jewelry
Other personal property
TOTAL ASSETS

Liabilities: Liabilities are presented in order of the nature of the claim in a manner similar to assets. Debts that are due within a short period of time such as credit card debt and other personal debt are listed first followed by auto loans, big-ticket loans, and last mortgage debt. The liability side of the Net Worth Statement looks something like this:

Current Bills: $
Credit Card Debt
Personal Loans
Medical Expenses Due
Other
Loans Payable:
Bank Notes
Home Equity Loans
Auto Loans
Big-ticket loans (furniture/appliances)
Income Tax Payable
Other
Long Term Notes Payable:
Mortgage Loans
Other
TOTAL LIABILITIES

To determine your total personal net worth, subtract your total liabilities from your total assets.

Total Assets $
Less: Total Liabilities
TOTAL PERSONAL NET WORTH $



What do these net worth results mean? Consider it a gage at how much you have borrowed in order to accumulate the assets that you own. In a perfect scenario, you will accumulate assets without borrowing. The two most basic ways to do this are to invest in assets that appreciate over time such as equities (stocks and mutual funds) and real estate and to save some of what you earn. More important than your actual net worth is having a starting point from which you can track your future accumulation of wealth. By understanding your present situation, you can build a plan that drives you to fulfill your financial goals.

AVOID THIS TRAP: Keep in mind that your net worth statement is useful only to you and your own personal situation and objectives. Many people try to measure their own financial success by comparing to the perceived success or failures of friends, neighbors, or others. Don’t do this. It will neither change your situation or theirs. Just because a neighbor purchased an expensive car or broke ground on a new addition to their house doesn’t mean that they are either a financial success or failure.

If you want to compare with macro-based data, the Federal Reserve Board conducts a periodic survey of consumer finances. In its latest survey, the median family net worth for various age groups were as follows (in thousands): Less than 35 years old - $14.2; ages 36 – 44 – $69.4; ages 45 – 54 - $144.7; ages 55 – 64 - $248.7; ages 65 – 74 - $190.1; and ages 75 and over - $163.1.

Be on alert if your net worth is negative or if your available cash does not provide enough money to sustain you for three to six months without income. Don’t panic if this is your situation, but do take action to develop an emergency cash fund. Make this your top priority!

As a second priority, put together a plan to get rid of your debts, focusing on the highest interest rate items first.