January 2009
Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Best wishes for a healthy, happy, and prosperous new year. As a new year begins, it is helpful to take stock of your financial situation. One of the most common ways that individuals and companies check their financial health is with a net worth statement (a.k.a., balance sheet). A net worth statement is a financial tool that shows your financial position at a given point in time. It is like a “financial snapshot” that shows the dollar value of what you own (assets) and what you owe (liabilities or debts). This formula for calculating net worth is Assets – Liabilities = Net Worth.
Net worth is the dollar amount you would have if all your assets were sold today for their current market value and all your debts were paid in full. For example, if your assets total $208,000 and you currently owe $8,000 on credit card balances, loans, and other debts, your net worth today would be $200,000. To calculate your net worth, first determine the value of everything that own. This value should be expressed as “current market value.” In other words, what your assets would be worth if they were sold today to a willing buyer. If recently purchased, the purchase price of your house or other real estate can be used. Otherwise, consult a real estate agent to get a market quote on the value of the property if you were to sell it now, or check recent sales figures for similar properties.
For personal possessions such as vehicles, household goods, clothing, and recreational equipment, the value is a bit more difficult to determine. Most of these items lose financial value (depreciate) from the date of purchase. Consult newspaper classified ads or Web sites to see what these possessions usually sell for. For life insurance, list only “cash value” policies (what you could borrow from a policy today). Term insurance pays only if the insured dies, and thus has no “cash value” for asset purposes. For investments, such as stocks and bonds, check the financial pages of a newspaper or a financial Web site, or call your broker for current price information.
In the liabilities section of a net worth statement, list the dollar value of debts. For mortgages, list the balance due. Also list unpaid bills due within the next month, credit card balances, and longer-term debts such as student loans. What does a net worth statement tell you? Obviously, if liabilities exceed the value of assets (negative net worth), you need to take corrective action immediately. However, even a person with a high net worth may have financial difficulties. Having many assets with low liquidity (inability to immediately convert assets to cash) may mean not having adequate cash available to pay current expenses if income suddenly decreases.
Having an updated net worth statement can be helpful when making financial decisions. Most loan applications, for example, require the financial data that appears on a net worth statement. Having a calculation done can speed up the loan application process. If you are overloaded with consumer (non-mortgage) debt, calculating your net worth can highlight the importance of debt reduction to improve your financial position.
Unfortunately, following the financial “tornado” of 2008, many people will likely see a reduction in their net worth since a year ago. Nevertheless, it is still important to see where you stand. While changes in the value of investments might have been beyond your control, other numbers, such as the amount of savings set aside for emergencies and the amount of total debt being carried, should ideally have shown progress. Take the time, during the cold winter months, to calculate your net worth. Then make a resolution to save more money and reduce debt. Your future financial security depends on it.