Knowing the basics of what a net worth statement means and how it works can help you have a clearer picture of where your finances stand. Also, discover how it can serve as a reference point to help you measure the progress of money goals.
Definition and Example of a Net Worth Statement
A net worth statement is a financial tool that shows the financial health and wealth of a company or individual at any given time. Your personal net worth is determined by calculating what you own (assets) minus what you owe (liabilities). A net worth statement provides a summary of your financial status. It gives you a clearer picture of the dollar value of what you own, which can help you measure your overall financial well-being.
Alternate name: Balance sheet, financial statement
If you want to prepare a net worth statement, you would need to list the total value of all your assets and subtract the value of your liabilities. For example, if the list of everything you own has a total value of $100,000 and the list of everything you owe has a value of $60,000, your net worth statement would show that you have a current net worth of $40,000.
How Does a Net Worth Statement Work?
A net worth statement acts as a financial document that helps measure your financial progress. You can use the statement to help you assess your current finances, track your net worth, and set long- or short-term financial goals. A net worth statement allows you to take an inventory of your assets versus your debts. When it comes to making important financial decisions, a net worth statement can be essential. For instance, suppose you are overloaded with debt. Completing a net worth statement can highlight the crucial areas you need to attack in your debt-reduction plan to improve your financial status. Also, when applying for a mortgage, most loan applications require the same financial data you’d see in a net worth statement. So having the information can speed up the application process.
Creating a Net Worth Statement
Putting together a net worth statement is not a difficult task. All it requires is a simple checklist and some basic math. Once you list the details of your debts and your assets, your net worth statement will reveal whether you have a negative or positive net worth. For example, if the value of all your assets totals $150,000 and all of your debts total $75,000, your net worth statement will show a positive net worth of $75,000. On the other hand, if your assets total $150,000 and your debts total $200,000, your net worth statement will reveal that you are $50,000 in the negative.
Money in any bank accountsBalance in investment accounts (stocks, bonds, retirement accounts, etc.)The market value of your home and cars, if applicableYour business interest or ownershipPersonal property such as household furnishing, jewelry, art, collectibles, and appliancesCash value of any insurance policies
Principal balance owed on a mortgage or real estate loanBalance on car loansCredit card balanceBalance on student loansAny medical or tax debt
While a negative net worth statement is not ideal, it’s not a lost cause, either. It simply means that if you’re able, you need to take prompt corrective actions to improve your financial status. Here are a few strategies to use to push your net worth statement into the positive:
Create a budget Pay down debts Save more Increase your retirement contributions Avoid taking on new debts
These strategies can help you improve your net worth statement and strengthen your financial health. Regardless of whether your net worth statement is positive or negative, it’s crucial to have a starting point and know where your financial situation stands. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
