This is an exercise that might sound daunting but it isn’t as difficult as it sounds. You might actually find it exciting! Start with the lists of all the things you OWN and all the things you OWE that we created in the post You Can’t Get There if You Don’t Know Where You Are Now. Now let’s put your lists to work.
Assets: I like to divide assets into three categories. You can do it however you please, but here is my method. In all cases on the net worth statement, we are talking about the balances of the accounts, or in cases of property, the value of the property (which you may need to estimate).
- Cash Assets: These would include things like:
- Checking accounts
- Savings accounts
- Money market accounts
- CDs, savings bonds
- Life insurance cash value (not death benefit)
- Investment Assets: Things like:
- Employer-provided retirement plans
- Traditional IRA accounts
- Roth IRA accounts
- Stocks, bonds, mutual funds
- Personal Assets: Don’t get too hung up here. Best guesses are fine.
- House (only if you own it)
- Personal property (your stuff – clothes, furniture, computers, etc.)
Notes on assets: For personal property, we use a rule of thumb estimate of $25,000 per adult in the household and just plug that in, versus tallying things up. If you have lots of expensive stuff, feel free to make line items, subdivide the category, and be as specific as you like. Remember, this is YOUR net worth, so report it the way that works best for you.
Liabilities: I usually lump these into one category, but feel free to divide them into short-term (e.g. credit card) and long-term (e.g. mortgage) liabilities if you prefer. Some folks like to divide them into unsecured loans (e.g. credit cards) and secured loans (e.g. mortgages). Secured means it is a loan with collateral, which is something the bank can take from you if you default.
- Examples of liabilities: Remember these are the balances due, not the payments.
- Auto loans
- Student loans
- Credit cards
- Medical debts
Notes on liabilities: While you are data gathering here, jot down the interest rate each debt charges, as well as the terms of the loans – number of payments and minimum payment due. This information will be useful later if you decide to accelerate debt payoff.
Compute your net worth: The next step is to tally up the sub-categories (if you made them) and then compute a total for all assets and a total for all liabilities. Your net worth is your assets minus your liabilities.
Hopefully your net worth is positive and not negative! But even if it is negative, don’t despair. Now you know where you stand, and you can work to improve your net worth. Net worth increases as the value of your assets increase and the amount of debt you carry decreases.
Good work! Next up, we’ll build your income statement. For people (versus companies), the income statement can also be referred to as a cash flow statement. I’m not picky on the technicalities here. The main thing is that you track the right numbers in your financial life, and it’s irrelevant what you call it. We’ll learn the difference between an income statement and a budget, however, as those two reports should be viewed differently.
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Comment below to tell me how this project went for you, or ask any questions you have!