What is your net worth – and why do you need to know?
Whether you are planning for your business, your children’s education or your retirement, your net worth needs to be determined and evaluated.
Figuring out one actual number that represents the total of your assets and liabilities helps you to track your financial increases and decreases. In these fluctuating times in real estate and the stock market, determining your net worth helps you to assess your current financial health so you can better plan for the future.
If you’ve never sat down and figured out your net worth, give it a try. You may be surprised to find out how much you are actually worth!
Why do you need to know your net worth?
It is essential to have a clear picture of exactly what your assets and liabilities are for many reasons, including:
- Home mortgage
- Personal credit
- College education
- A new business
- Succession planning
- Bank loans
- Estate planning
- Retirement planning
- Divorce
Where do you get the information?
The process of determining your net worth involves gathering all pertinent financial information regarding your assets and liabilities. Doing this does not have to be overly burdensome if you know what to look for.
You must be sure that a complete inventory of assets and liabilities has been included and reasonable values have been used for such assets as real estate and interests in closely held businesses.
The following is a list of documents you should gather to prepare an accurate picture of your net worth.
- Bank statements
- Brokerage statements
- Mutual fund statements
- Life insurance policies/Annual statements
- Tax returns
- Partnership forms
- Valuations of businesses owned
- Mortgage statements
- Credit card statements
- List of purchase price of investment assets
How is your net worth determined?
The formula for determining your net worth is really quite simple.
ASSETS – LIABILITIES = NET WORTH
It is often desirable to group the assets on your net worth statement by their type, such as liquid, investment and personal. The following list shows how common assets are usually classified.
ASSETS
Liquid
- Cash
- CDs
- Money market funds
- Treasury bills
Investment
- Stocks & bonds
- Mutual funds
- Partnership interests
- Real estate
- Rental property
- Vacant land
- Closely held businesses
- Corporate retirement plans
- Individual retirement accounts (IRAs)
- 401(k) plans
- Annuities
- Life insurance cash value
Personal
- Personal residence
- Vacation homes
- Household furnishings
- Automobiles and boats
- Collectibles and antiques
- Jewelry
LIABILITIES
- Mortgages
- Automobile loans
- Life insurance loans
- Credit cards
- Brokerage margin loans
- Other personal loans
What else should be included?
It is also common to include the following types of information, which are usually presented as footnotes at the end of the net worth statement.
- Life Insurance: Face value (death benefit) of any policies you own.
- Closely held businesses: Summary of the financial activity and condition of any business interests.
- Future Interests: These represent a nonforfeitable right to receive future sums of determinable amounts of money that are not contingent on some future event. Examples include vested interests in pension or profit-sharing plans, beneficial interests in trusts and fixed alimony receipts.
- Contingent Liabilities: These are items that may cause a financial obligation in the future. Examples include loans that you have personally guaranteed, lawsuits and pending tax audits.