PERSONAL FINANCE • READ TIME: 6 MIN
"It takes as much energy to wish as it does to plan."
Eleanor Roosevelt
Your Net Worth Statement: What's Owned and Owed
The end of a calendar year marks an ideal time to update (or create) your financial statements. The two basic types of financial statements are (1) the statement of financial position and (2) the cash flow statement. For the purposes of this article, we will examine the statement of financial position – which may also be referred to as a “net worth statement.”
Generally, a statement of financial position seeks to clarify what is owned (assets) and what is owed (liabilities) for an individual or family. By outlining both assets and liabilities – in the same way a business prepares a balance sheet – we are able to identify net worth (at a particular time; a snapshot).
The following paragraphs outline net worth, assets, liabilities, how to use footnotes in a statement of financial position, and how to use our Net Worth Worksheet for preparing your own net worth statement.
Calculating Net Worth
Net worth is calculated by subtracting total liabilities from total assets, and is, therefore, the end result of working through and developing a statement of financial position.
Net Worth = Total Assets – Total Liabilities
As a net worth statement is a snapshot at a particular point in time, fluctuations in net worth between statements are to be expected.
Tracking net worth is useful for, among others, (1) assessing “financial health,” (2) tracking progress toward financial goals, such as paying down debts or meeting retirement goals, (3) planning for future purchases or investments, and (4) qualifying for loans or alternative investment opportunities (some loans and alternative investments require a net worth statement and/or minimum net worth).
Net worth is just one metric used in the overall assessment of an individual’s (or family’s) financial position. Adequate insurance coverage, sufficient liquidity, appropriate asset allocation, etc. are all examples of other factors worth consideration in determining financial needs, strengths, and weaknesses. Net worth, and the “calculus” behind arriving at this figure, does provide a significant baseline, though.
Types of Assets on a Net Worth Statement
Assets are divided into the following overarching categories in a statement of financial position: cash and cash equivalents, invested assets (broken down further into other sections), and use assets. Assets are shown at fair market value on a statement of financial position. More information on the classification of assets is provided in the paragraphs below.
Cash and Cash Equivalents
Current assets (cash and cash equivalents) are low-risk assets that can easily be converted to cash. Common liquid assets to be listed in this category include bank accounts (checking, savings, etc.), money market accounts, and certificates of deposit with less than 90 days to maturity. The sum of these accounts may be understood to be your “liquid net worth,” and will primarily be used to determine your total emergency fund (assets on hand in case of an emergency).
Invested Assets
Invested assets, as a category, may be further broken down into general investment accounts (usually taxable accounts), retirement accounts, and business ownership interests. The division between taxable and qualified accounts in a statement of financial purpose provides additional liquidity information and/or potential sources of funding for tax-advantaged accounts. If a significant portion of investment funds are held in qualified accounts (401(k)s or IRAs) or tied up in business interests, then more thought needs to be given to overall liquidity and emergency funds (because these types of accounts are more illiquid than taxable accounts).
Personal Use Assets
Use assets are typically the most illiquid assets on a statement of financial position. This category includes assets such as residences, automobiles, boats or other recreational vehicles, personal effects (jewelry, furniture, art, etc.), and other real estate. Again, when completing this section on a net worth worksheet, remember that the values imputed are FMV (fair market value).
Understanding Liabilities on a Net Worth Statement
Liabilities, divided into current (short-term) and long-term liabilities, detail what is “owed” in a statement of financial position. Current liabilities are those due up to one year (typically credit cards, short-term loans, etc.) from the statement date, and long-term liabilities (mortgages, student loans, etc.) are those due more than one year from the statement date.
Typically, outstanding principal balance is listed for the sections under “Liabilities.” If any payments are overdue, then it is important to add both principal and accrued interest in order to arrive at a final total per category.
Utilizing Footnotes on a Net Worth Statement
Footnotes, as with any other type of document are used for the purpose of clarification. They should be used in a statement of financial position to clarify circumstances not enumerated in the body of the document (such as inheritances, contingencies, surrender charges [if applicable], etc.) Additionally, footnotes and corresponding labels throughout the document may indicate account ownership if the statement of financial purpose is for a family, or if accounts listed on a personal statement of financial purpose are jointly owned.
Working Through the Downloadable Worksheet
Click here to view and download the worksheet: RP Wealth Advisors Net Worth Worksheet
Now, with an understanding of the sections that make up a statement of financial position (net worth statement), you are equipped to develop your own. After a thorough review of accounts, statements, balances, etc., you can begin to plug the numbers in to the worksheet linked above to calculate your assets, liabilities, and net worth.
The true value of this exercise is to develop an awareness of your holistic financial status, and to track changes over time. As you track net worth over time, the goal is to see increases in assets and net worth, and a reduction of liabilities. Knowing the details behind assets and liabilities can help you make better decisions with your finances, and can aid RP Wealth Advisors in providing sound, comprehensive financial advice.
One Facet of Your Financial Picture
In addition to aggregating information related to our clients’ objectives, resources, risk tolerance, and other pertinent factors, a statement of financial position is an integral tool for the RP Wealth Advisors team in developing holistic plans and assessing financial wellness for our clients.
Furthermore, regular updates to net worth statements will provide more accurate tracking related to progression toward financial goals – eliminating debts, increasing liquid net worth, estate planning, etc.
If you are interested in learning more about the preparation of a statement of financial position, or would like begin a dialogue on how this exercise can be used as a piece of our holistic planning services, let our team assist you – click here to connect with us.
The content is developed from sources believed to be providing accurate information. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy referenced here will be successful. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by RP Wealth Advisors to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.