As with any road map, before you can determine how to get from here to there, you need to know where “here” is. Where do you stand financially? Answering this critical question is the job of the net worth statement. Your net worth is the difference between all the things of value that you own and all the debts you owe—or, in financial terms, your assets minus your liabilities. Your net worth statement is a list of each of these items and their current value or balance.
The net worth statement gives you a snapshot of your financial condition at the current moment. You need this information to effectively set the financial goals you’ll be working toward, assess your progress along the way, and make adjustments, using the important clues gleaned from updating your net worth statement on a regular basis. It will also come in handy when applying for a mortgage, credit card, or car loan. Sometimes people avoid making a list of their debts because they’re afraid they won’t like what they find, or they believe they already have a good “gut feel” for their overall financial picture. However, avoiding your total debt picture can cause major financial damage, and gut feelings can be way off the mark. Not having a handle on your financial condition can seriously hurt you in a time of crisis, such as a job loss or disability, and it’s difficult, if not impossible, to plan for the future if you don’t know where you are today.
Start by listing all the things of value that you own, even if you owe money on them, such as your house and car. Use their full market value as of today. The balances of the loans related to these assets will be included in the liabilities section, so your equity (the amount you actually own) in the assets you list won’t be overstated. For bonds, stock options, and retirement accounts, use the current value, not the value at maturity or the value on the date you’re fully vested. You should receive statements showing the current value of your accounts from your employer for retirement accounts and from your broker for bonds, and most financial institutions offer online account services with values updated daily. The human resources department where you work can help you determine the current value of your company stock options.
List only those life insurance policies that have a cash value. Most life insurance policies are provided by employers and are term policies good only for the time you’re employed by that company. These are not considered assets. If you’ve purchased cash-value life insurance from an agent and you’re unsure of the current cash value, she should be able to help you determine the amount you would get if you cashed it in today. Use that amount for your net worth statement.
For cars and other vehicles, use the Kelley Blue Book value, which is the estimated price the car would sell for if sold privately to another consumer or to a car dealer. You can look up Kelley Blue Book values at the library or online at www.kbb.com. For all other assets, use your best estimate of the fair market value.
Assets
Now you’ve listed everything you own that has a monetary value, but the total is not a true representation of your financial worth. It doesn’t take into account the money you may owe banks or finance companies before you fully own some of your assets—such as your house or car, for example. It also doesn’t take into account the money you owe to other creditors. These are called your liabilities.
Liabilities
Fair Market Value
The fair market value is the price a willing, rational, and knowledgeable buyer would pay. It may be more or less than you paid for the item and is the most meaningful measure of its current worth.
When you’ve listed everything you can think of, total the assets and then total the liabilities. Now, subtract your liabilities from your assets. If the number is positive (assets are greater than liabilities), you have a positive net worth. Congratulations! Now you can start working on building that net worth. If the number is negative (liabilities are greater than assets), you have a negative net worth, but don’t let it discourage you; it’s just your starting point. Negative net worth is extremely common, especially for people who’ve recently entered the workforce. Now that you know exactly where you stand, you can map out your route to a positive net worth.