A net worth statement is a financial statement used to list an individual’s or family’s assets and liabilities. Assets are valuables owned by a person, while liabilities are monies owed by a person.
The Net Worth Equation
Net worth is calculated by subtracting total liabilities from total assets.
Net Worth = Assets – Liabilities
If you liabilities are greater than your assets, you are considered to have a Deficit Net Worth.
Deficit Net Worth: Liabilities > Assets
Why are net worth statements important?
Net worth statements gives you a holistic view of where you stand financially. You will be able to see how much your investments have grown and how much insurance coverage you currently hold. Also, if you have made the commitment to repay your debts by a specific period of time, you will be able to ascertain if it has been accomplished by the reduction in the total amount of money you owe. The greater your net worth, the greater your financial health.
How do I calculate my Net Worth?
Here are five simple steps you can take to calculate your Net Worth:
1. First create two columns, one for Assets and one for Liabilities.
2. List these three categories under the Assets column:
- Current Assets (e.g. savings accounts, chequing accounts, cash)
- Fixed Assets (e.g. house, cars)
- Investments (registered retirement savings plan (RRSP), mutual fund)
Under each of the three categories of assets, list what you currently own under each heading and assign a current value to them.
As it relates to your retirement plan and other forms of insurance, do not place the amount you are currently covered by in your policy. Contact your insurance agent to find out how much your policy is worth to date.
3. List these two categories under the Liabilities column:
- Loans (e.g. car loans, mortgage, student loans)
- Other Debt (e.g. credit cards)
Under each of the two categories of liabilities, list what you currently owe under each heading and assign a current value to them.
4. Total your assets and liabilities. Then proceed to calculate your net worth.
5. Update your net worth statement on a regular basis. Your values will change overtime. Your assets may increase and your liabilities may decrease.
Having sense of your current financial status is necessary. It teaches you to accountable in every financial decision you make.
Remember, the greater your net worth, the closer you are to achieving your desired level of financial stability for you and your family.