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Your net worth statement is a snapshot of where you stand financially at a given point in time.

The starting point

As part of deciding how to pursue your financial goals, you should take a look at where you stand right now. You do that by adding your assets – such as cash, investments, and pension plans – in one column and your liabilities – or debts – in the other. Then subtract your liabilities from your assets to find your net worth.

Net worth doesn’t measure cash flow, but there’s a clear relationship between how you spend your money and what your financial picture looks like. If your assets outweigh your liabilities, you have a positive net worth. If your liabilities are larger, you have a negative net worth. Most experts would say your first goal should be getting into the black.

Knowing how your assets are divided is especially helpful for financial planning. For example, if you have more money in cash than invested in stocks, bonds, mutual funds, and annuities, you may want to diversify your holdings to increase the potential for long-term growth and income. And if you have nothing set aside for retirement, you may want to find a way to start.

Assets: What you own

Cash reserve assets are cash, or the equivalent of cash, that you can use on short notice to cover an emergency or make an investment. They include the money in your checking, savings, and money market accounts, CDs, Treasury bills, and the cash value of your life insurance policy. It’s a good idea to have a cash reserve of three to six months.

Investment assets, including stocks, bonds, and mutual funds, are designed to produce income and growth. Retirement plans and variable annuities are considered long-term investments.

Personal assets are your possessions. Some – like antiques, stamp collections, and art – may appreciate, or increase in value, making them investments as well. Others – like cars, boats, and electronic equipment – depreciate, or decrease, in value over time.

Real estate is a special asset because you can use it yourself, rent it, or perhaps sell it for a profit.

To help clarify, here’s a sample asset inventory:

                                       Current estimated
Assets                                  value (examples)
Cash in banks & money market accounts            $20,000
Amounts owed to you                                   $0
Stocks/bonds                                     $14,000
Mutual funds                                     $15,000
Life insurance (cash surrender value)             $8,000
IRA & Keogh accounts                             $40,000
Pension & 401(k) (vested interest)              $135,000
Real estate: 
  Home                                          $200,000
  Other                                               $0
Business interests                                    $0
Personal property*                             + $30,000
Total assets                                    $462,000
*Includes furnishings, jewelry, collections, 
cars, security deposit or rent, etc.

Fair market value

When you’re calculating what your assets are worth, the number to use is their fair market value. That’s the price a willing, rational, and knowledgeable buyer would pay for things you are willing to sell.

Liabilities: What you owe currently and long-term

Short-term debts are your current bills: credit card charges, installment and personal loans, income and real estate taxes, and insurance premiums. You generally include your credit card balances, even if you regularly pay your entire bill each month.

Long-term debts are mortgages and other loans that you repay in installments over several years.

To help clarify, here’s a sample liability inventory:

Liabilities           Amount (example)
Mortgages                    $160,000
Bank loans                         $0
Car loan                       $7,000
Lines of credit                $3,000
Charge accounts                $1,800
Margin loans                       $0
Alimony                            $0
Taxes owed:
  Income                      $21,000
  Real estate                  $3,200
  Other                            $0
Other liabilities:
  College Loan                 $7,000
  Insurance                    $3,500
Business loan                    + $0
Total liabilities            $206,500

Using the above examples, you would calculate net worth by subtracting $206,500 from $462,000. In this case, total net worth is $255,500.

Other perspectives

When potential lenders assess your loan or credit card application – basically a net worth statement – to decide whether you qualify to borrow, they look at what you already owe. But they may also calculate what you might owe if you charged as much as you could on all your credit cards and drew on all your authorized lines of credit.

Lenders also look at your net worth statement for cash reserves and investment accounts. Having investments means that you have resources to tap into in an emergency, including assets that could be sold to pay your debts.

Using net worth statements

Figuring your net worth is not only a critical first step in financial planning. It will also come in handy in many financial situations. For example:

  • Mortgage lenders require a statement of your assets and liabilities as part of your application
  • College financial aid is based on your net worth, so you’ll have to report your assets and liabilities when your children apply for aid
  • Loan and line-of-credit applications usually require net worth statements
  • Certain high-risk investments may require that you have a minimum net worth – say $1 million or more – and require a net worth statement as evidence

This article originally appeared in Your Retirement Center, a free retirement education resource from Mutual of America, a Mission:Money sponsor, and has been edited by the Georgia Center for Nonprofits.

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