Creating Your Net Worth Statement

A Net Worth Statement is one of two key financial statements (along with your budget) for your household. With these two personal financial documents, you can make highly informed financial decisions and truly understand where you are and where you are headed.

What is a Net Worth Statement?

A Net Worth Statement is a summary of what you own (Assets) and what you owe (Liabilities). Your "Net Worth" is calculated by subtracting your liabilities from your assets.

Assets include things like your bank accounts, retirement accounts, HSAs, FSAs, investment accounts, and real estate. Liabilities are generally your debts: mortgages, student loans, auto loans, credit cards, and other debts.

Why is Net Worth important?

Net Worth is a holistic measure of your financial health. Through this one document you view your entire financial picture and how each piece relates to the whole. With this view, you can evaluate where you can really move the needle and where your time is best spent.

Tracking Net Worth over time allows you to see how your financial health is trending, reveal imbalances, and identify opportunities. Opportunities or questions to consider with your net worth statement include:

• Do your bank balances satisfy your emergency fund target?
• Are you comfortable with your debt payments, including terms and interest rates? Do you have any high-interest debt you would like to target with additional payments?
• Where are your investments held and do you have an overarching investment policy for your asset allocation? Do you have old 401(k) accounts or other accounts that could be consolidated to simplify your life and more easily manage your investments?
• Do you have multiple bank accounts that could be consolidated? Or credit cards that are no longer in use but are still charging an annual fee?

How to Create Your Net Worth Statement

Sit down with pen and paper or create an excel file to record your current net worth. I prefer using excel or a digital option that allows you to easily update and analyze your Net Worth. Your Net Worth is just a point-in-time figure; tracking your net worth over time is as important as what your net worth is today.

Step 1: Assets

1. List your assets (bank accounts, investments, real estate) and their current value. For real estate, use an estimate, last appraisal value, or your purchase price. You can also include things like cars, valuables, and other items, but I generally ignore these types of assets.
2. Next to each asset value, list the current interest rate or assumed rate of return. For bank accounts, enter the current rate on the account. For investment accounts, make return assumptions based on your asset allocation. For real estate, an estimate of future inflation is a fine, conservative assumption.
3. In the next column, include any "Planned Savings" (from your budget) that you are contributing to these accounts. For work-sponsored accounts, you can also include company matches or contributions.

Step 2: Liabilities

Follow a very similar process for your liabilities:

1. List all debts and current balances
2. Next to each balance, list the interest rate charged on the debt
3. In the next column, enter the monthly payment on each debt. For mortgage payments, make sure to only include the principal and interest portion of your monthly payment (not home insurance, taxes, or escrow payments).

Step 3: Net Worth

Subtract your Liabilities from your Assets to calculate your Net Worth.

Step 4 (Optional): Make Projections

If you're good in excel, use your inputs to project where you may end up in 5, 10, or 20 years using these assumptions. Then make changes to your planned savings and debt payments to understand how these changes would impact your net worth over time.

Example Net Worth Statement

Below is an example of a net worth statement for Jack and Rose. 

Assets are grouped according to their purpose or account-type: Short-term savings, Health Savings Accounts, Retirement Accounts (401(k)'s and IRAs), Taxable Investment Accounts, and Education (529) plans. Return/Interest rate assumptions are low for their bank accounts (0.10%), modest for their home (2.0%), and higher for their investment accounts (6.0%), which are invested aggressively. Projections for 5, 10, and 20 years in the future are based on current monthly contributions and return assumptions.

A few considerations for Jack and Rose as they review their Net Worth Statement:

• How does their $48,000 in short-term savings compare to their monthly spending? Is this in-line with their emergency fund target?
• Several different custodians (TD Ameritrade, Altruist, Vanguard, Fidelity) are used for their IRAs and taxable investments. Could these accounts be managed in one place?
• Do Jack and Rose have an investment plan for all of their accounts? How often do they review their accounts, options, and need to rebalance?
• Are credit card bills paid off monthly? The 24% interest rate is far higher than what they should expect to earn on their assets.

Your Next Steps

Create Your Net Worth Statement and Track It Over Time

Your Net Worth Statement is just a point-in-time value. Sit down each month or quarter to update these figures and see how your net worth is trending.

Make Some Changes (or identify what you want the next change to be)

Get your emergency fund to its target. Invest excess money sitting in your bank account. Make a change in your planned savings or target high-interest debt to payoff more quickly.

Automate Your Personal Financial Statements

Use a personal finance app to track your Net Worth, Budget, and more.

By creating your budget and net worth statements, you are well on your way to making informed decisions about your personal finances. You are also far better equipped to work with an advisor and provide the level of detail required for holistic financial advice.

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