Money for Life Applied Principle #6 – Take a candid assessment by preparing a Net-Worth Statement
As we’ve discussed, the process of changing your financial position takes commitment, sincere desire and even discipline. It also takes a willingness to candidly analyze your current situation.
“When you join a fitness club for the purpose of losing weight or becoming physically fit, you will usually participate in an assessment of your level of physical fitness. A fitness coach will determine your current weight, measurements, body-fat ratio, and resting heart rate to define the best starting point for your fitness program. As you move forward with the program, your coach will take ongoing measurements and review the progress made.
This initial statement of physical health is very important. Without knowing where you are, it is difficult to understand where you need to go. This information becomes much more black and white when it is put into writing.”
In much the same way, you need to do the same thing with your current financial position. Figuring out exactly where you stand today is the best way to move forward in a meaningful way. Creating your initial Net-Worth Statement will help you in much the same way that a physical fitness assessment helps you know how to move forward.
“Many financial professionals view your Net-Worth Statement as the measurement of your personal wealth. A positive net worth indicates that the monetary value of your assets is greater than the total of all your liabilities. Negative net worth indicates you owe more in debt than the total monetary value of what you own.
Many people with average to high incomes have relatively low net worth. The financial challenges facing most people are not dependent on the amount they earn but on how they manage what they earn.”
Follow 3 easy steps and complete your personal Net-Worth Statement –
Step 1 – Make a list of your assets and their corresponding value
Step 2 – Complete a list of all debt obligations or liabilities
Step 3 – Calculate your net worth
“STEP 1: Make a list of your assets and their corresponding value.
The first list to compile is your cash-equivalent assets. This includes the balance in your checking accounts, savings accounts, 401(k) accounts, IRA accounts, the cash value of life insurance policies, and the current market value of stocks, bonds, or other marketable securities.
The second list to compile is your real estate holdings. This includes the market value of your home and any other property you own.
The final list of assets would be an itemization of personal property. This would include the current value of vehicles, furniture, and higher-priced personal property like recreation vehicles, jewelry, collectibles, and, perhaps, electronic equipment.
STEP 2: Complete a list of all debt obligations (liabilities).
In this step, list all of your debt obligations. Start with the current amount you owe on your house, home equity loans, and debt consolidation loans. Then, list the amount you owe on vehicle loans. Finally, list the balance owed to all consumer debt accounts, including personal loans, student loans, charge accounts, credit card accounts, and any other type of consumer debt. You should be able to find the current balance for each of your debts by checking your most recent statement or by checking for the balance online.
STEP 3: Calculate your net worth.
To finalize the calculation of your net worth, total the value of all assets listed. Then total the value of all liabilities listed. Once you have completed these calculations, subtract the total value of your liabilities from the total value of your assets. The resulting number is an approximation of your current net worth.
At this stage, it is critical that you be completely honest with yourself on the value of your assets and make sure you have created a comprehensive list of all debts. The first time you see this number in black and white, you may be startled or disappointed. The idea here is not to cast you into deep despair, but to see where you are today and to provide a benchmark to measure against in the future. Place a date on the statement you have just created and be prepared to create a new statement every three to six months. You will be amazed at how quickly you can make meaningful progress when you have become committed to following the path to financial fitness.”
Contains excerpts from Applied Principle 5, Money for Life, by Steven B Smith