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Summary

A Net Worth Statement is an accounting of everything you own and everything you owe. It illustrates your finances at a specific moment in time. It's a spring board from which to make plans to better your financial situation. (We discuss how in the section below: Reviewing Your Net Worth Statement).

You can create a Net Worth Statement to provide a summarized financial snapshot in a few minutes. If desired, you can then make it more detailed over time.

If you've set financial goals, redo your net worth statement every six months to track your progress toward them.

If you would like to plan ahead to see what you would have to spend if you became disabled or go on retirement -- and how long your money could last -- see Financial Planning For Disability and How Long Will Your Money Last?

For information about a net worth statement, see:

How A Net Worth Statement Works For You

A Net Worth Statement serves a batch of purposes. It:

  • Provides a snapshot of your finances.
  • Shows the amount of cash you can access immediately in an emergency.
  • Identifies assets you could access over a period of time.
  • Provides a benchmark for future comparison so you can track your progress toward your financial goals.
  • Gives you a basis from which you can project your future financial standing.
  • Helps you evaluate your property, casualty, and liability insurance needs.
  • Shows what assets you can leave to your heirs, and whether your estate might be subject to estate taxes.

Gathering Information For A Net Worth Statement

Before completing your net worth statement, collect as much information as you can. This will make your job much easier.

If you haven't already, consider taking this opportunity to also Set up a Filing System and complete your Document Inventory and Instruction List.

Asset Information -- Collect information about your assets, including:

  • Your most recent checking and savings account statements.
  • Your most recent brokerage account statement.
  • The current value of all stocks, bonds, and mutual funds that are not kept in your brokerage account or retirement plan.
  • Your most recent IRA account statement.
  • Your most recent employee retirement plan statements. If you have a traditional pension-type plan, you'll probably need to contact your human resources department to find out the current vested value of your benefits under the plan. The "vested value" is the amount the belongs to you no matter what happens.
  • Your most recent statement for each life insurance policy that accumulates cash value -- the amount of money that can be borrowed against while the policy is in force, or that you receive if you cancel a policy. Term life policies do not have cash value.
  • Your Household Inventory, which will help you estimate the value of your personal household goods and other personal property.
  • The current retail value of your automobile(s). You can access Kelley Blue Book (www.kbb.com offsite link) or Edmund's (www.edmunds.com offsite link) to get an estimate.
  • Your home's current market value. To determine this number, consider using a value that's an average of recent sale prices of similar homes in your neighborhood. You could also check your newspaper real estate section or contact a real estate broker for a valuation.

While you're determining current market value of your home, it would be helpful to determine two valuations. The lowest valuation would be what you could get for the house if you had to sell it in a hurry. The second valuation would be what you could reasonably expect to get for it if you didn't have to rush a sale. When looking at the value of your assets, unless you know now you'll have to sell in a hurry, use the number from a reasonable sale.

Debt Information -- Gather information about all of your debts such as:

  • Your most recent credit card, mortgage and bank loan statements. Your monthly statement should include the amount of the outstanding debt, even of your mortgage. If not, check online or call the lender.
  • The amount you would have to pay on your auto loan if you wanted to pay it off today. If your statement doesn't include this number, call your lender's toll-free number and tell them you want the "payoff value" on your loan. "Payoff value" is the amount you would pay today to pay off the debt entirely.
  • A list of all your other debts, including personal loans and past due bills.

Tips To Consider When Creating Your Net Worth Statement

Once you gather the information listed above, completing your statement will be relatively simple. You can find the form for a Net Worth Statement by clicking here. (If you've already signed in, your work can be saved to your Individual Home Page.)

To create a statement that is as useful as possible -- and not spend the weekend preparing it -- keep the following in mind:

  • Estimate where necessary. Unless you have exact information, it's OK to include an estimate. You are not preparing an audited statement for an accountant's scrutiny; you just want to get a fix on how much and what types of assets you own, and how much you owe to whom.
  • Use exact numbers if they are readily available. The computer will do the addition. If you don't have them, round them off. Depending on your circumstances, this can be in hundreds, or thousands or even ten thousand amounts.
  • When you're entering values for an asset, use the fair market value. Don't deduct what you owe on items such as a car or home. You'll list your debts separately further down in the chart.
  • If you are part of a couple and combine your income and expenses, make entries in the worksheet based on your incomes and expenses added together.
  • Don't kick yourself for having a negative net worth, nothing more than cash under a mattress, or a small portfolio compared to other people in your social circle. Regardless of where you are now, you can take steps to improve your financial standing and meet your financial goals.

Reviewing Your Net Worth Statement

Now that you have a spreadsheet full of numbers: what does it mean? To help figure that out, ask yourself the following questions, looking to your net worth statement and the other articles we mention for answers.

As you review the questions, keep in mind that these are just some of the questions that a net worth statement can help you answer. Only you know what's more important to you. Focus on what's important to you first.

Read your net worth statement over a few times on different days. Chances are, you'll discover something new each time.

If you need help interpreting your statement, consider hiring a fee-paid Financial Planner. See Choosing A Financial Planner.

What is my net worth?

If your net worth is negative, review Managing Your Debt, Increasing Your Income, Spending Less, How To Deal With A Financial Crunch and, perhaps, Bankruptcy.

If your net worth is positive, compare your net worth to your income. Consider setting a goal of having a net worth of at least twice your annual income -- especially if you're possibly headed for disability or early retirement.

Are my assets sufficient to live off of if I become disabled?

Now that you know what you own and owe, take a look at what would happen if you became disabled. Based on how much you are now saving and how much you currently own, how much will you have in the future to live off of if you become disabled? See Financial Planning For Disability. Also see: Determining How Much I Need For Retirement, Savings Calculator (to determine how much you need to save to reach your financial goal), and How Long Will Your Savings Last?

How much short-term debt do I have?

Short-term debt tends to cost more than long term debt such as a mortgage on a home because of higher interest rates. Compare your liquid and invested assets to your short-term debt. Does it make sense for you to pay off that debt? Unless the interest rate you can earn on the money you would be accessing to pay short-term debts is higher after tax than the interest you pay on your credit cards, paying off these debts might make sense for you. See Managing Your Debt.

Do I have an emergency fund? If so, is it accessible?

It's always good to have some cash in reserve, even if you have short term debt with a rate of interest higher than you're earning on the savings. While we'll tell you more about your emergency fund in Assessing Your Financial Goals and Your Cash Flow, be aware that the money you have earmarked for your emergency fund should all be held in the assets in the chart's first box: "Liquid Assets: Cash and Cash Equivalents." (See Emergency+Fund)

What about long-term debts?

Compare your long-term debts to your invested assets. If you can, it might make sense to pay off some of these debts to save on interest. However, before doing so, consider the following:

  • Capital Gains Taxes: Before liquidating assets to pay off debts, consider the tax you may have to pay on the increase in the value of your investment.
  • Loss of Income: If the assets you might use to pay off debt pay dividends or interest on a regular basis, and you use this income to live off of in part or in full, realize that that income stream will end when you sell the asset. However, your need for income might also be less if your monthly debt payments are decreased or eliminated.
  • Your life expectancy: If your life expectancy is less than two years, you might be better off conserving your cash -- especially if you have credit life or disability insurance.
  • Credit Life or Disability Insurance: If you have credit life or credit disability insurance on your home and/or auto that you think you might use in the next two years, it might make sense to not pay down long-term debt since you'll be using money to make payments that the insurance company would make if you filed a claim.
  • Your after-tax rate of return: Calculate the after-tax return you earn on the money you would use to pay off long-term debts and compare that to the cost of the debt.
  • Loans (not mortgages): If the interest you pay is higher than the after tax return on your investment, you might be better off paying off or paying down the loan. To make this calculation: take the average rate of return on your investments and multiply by one minus your tax rate. Then, compare the result to what you pay in interest on the loan. For example, let's look at Krystal's car:

KRYSTAL'S CAR

Krystal has a $5,000 car loan that charges 10% interest and $5,000 in a mutual fund earning 12%, half or which is in dividends, which are taxed as income and not capital gains. Krystal is in a 28% combined federal and state tax bracket and 20% capital gains tax bracket.

Auto Loan: Guaranteed to lose 10% interest per year, after tax.

Mutual Fund:

  • Krystal earns 6% in interest on which she pays tax at a 28% rate ''" her tax bracket. This is an after-tax return of 4.32%, calculated as follows: .06 times (1 minus .28).

  • Krystal's mutual fund investment grows in value at the rate of 6% per year, but when she sells her interest she'll pay 20% capital gains taxes on the growth. This is a 4.8% after-tax rate of return calculated as follows: .06 times (1 minus .20).

So, Crystal's after-tax rate of return on the mutual fund is:

4.32% + 4.8% = 9.12%

Krystal is not earning as much on her mutual fund as she is paying in interest on her loan. Unless she has a short life expectancy and credit life insurance on the loan, or unless she expects to go on disability within the next year and has credit disability insurance on the loan, Krystal should consider paying off the loan. If she does, she'll be earning a guaranteed after-tax return of 10%.

NOTE: If Krystal had a condition which had a statistical life expectancy of less than two-years, she might be better off trading in her car for a new one, putting up as little as she can as a down payment and getting credit life insurance on the debt resulting from the purchase. This way, she would also keep the mutual funds to supplement her income should she become disabled. If Krystal also got disability insurance on the loan, the insurance might make her monthly payments for her.