If you’re just stopping by for the first time, this is the second class in a series of classes over the next few months which will culminate in the development of a complete financial plan. Stop by the orientation class HERE first for class orientation/overviews and HERE for more information about the website.
Class Objectives: To understand how to create and use a net worth statement.
Prerequisites: PF101: Personal Finance Overview & Goals
Handout: Summary of Net Worth Categories
Assignment: Download and complete the Net Worth Statement in Excel | Google Docs
Welcome! Now that you’ve written out all your financial goals, you’re ready to see where you’re at financially. Today we are going to create a net worth statement for the most recent quarter (end of March, June, September or December). For example, if you are starting this class in August, you are going to start your net worth statement with balances starting at the end of June. Don’t feel like you need to go way back and re-create the past all the way back to the previous year. It probably isn’t worth the time-just keep moving forward! I suggest starting with the end of a quarter like this, as this is when statements come out for most investment & retirement accounts, college savings accounts, etc.
When is was working in public accounting, I had a wealthy client for which I prepared personal net worth statements and personal tax returns each year. She was a small business owner and the first year I prepared her tax returns, her W-2 wages were over a million dollars. This was so exciting to me as an intern still in college, and I loved to see what she spent her money on each year-additions to their gun collection, a $200,000 diamond ring, furniture, cars, and more.
My net worth statement is not quite this exciting, but it is so motivating to me to see that net worth number growing every quarter and every year. It’s a clear way to see that my efforts to save are actually getting me somewhere so that I’m motivated to keep sticking to my budget and not just spend, spend, spend.
WHAT IS IT AND WHY IS IT IMPORTANT?
Your net worth statement is going to give you a brutally honest picture of your finances if you spend the time to complete it thoroughly. It is a list of all your assets (think money, belongings) and list of all your liabilities (think anything you owe to someone else-credit cards, mortgage, etc.). The difference between your assets and your liabilities is called your net worth. Another way to think of this is it’s the amount you’d have left if you were to sell everything you own and pay off everything that you owe to others, or it’s the amount that you’d still owe after selling everything (ouch!).
Completing your net worth statements on a quarterly basis is going to help you to:
- Be able to get a clear view of your financial situation at certain points in time (first that point in time is right now!)
- Assist you in tracking your financial goals
- Focus your efforts on reducing your debt by seeing the big picture
- See the correlation between turning money into assets that generate more money
WHERE DO I START?
You’ve got this! But, I need to warn you that it is going to take some time to get all the information you need at first. Start by gathering all your statements and use this spreadsheet and the handout at the bottom as a guide for what you should include in your net worth statement.
Let’s go through each asset category step-by-step (you may want to grab a snack for this…):
- CASH– Estimate how much physical cash you had in your wallet and under your mattress/safe/other secret place.
- CHECKING, SAVINGS, MONEY MARKET ACCOUNTS AND CD’S– Look at the balances on your statements, or login to your account online to check the balance for the end of the quarter date. My checking & savings account statements for some reason are right in the middle of the month (the 22nd-why???) so I login to my account and get the information there.
- LIFE INSURANCE CASH VALUE– Some insurance policies have a cash value, which is a portion of your premium that is set aside and grows tax-free. It is not the same as the value that your beneficiary would receive upon death. You can obtain this amount on your quarterly statement or by logging into your account online. If you have term life insurance, you don’t have to worry about this. If you don’t have any life insurance, you also don’t have to worry about this, but have greater worries and we’ll cover that in a later course.
- OTHER CASH EQUIVALENTS– Include here of anything else you have that you could instantly convert to cash. Treasury bills, short-term U.S. savings bonds are a couple of examples.
- RECEIVABLES-MEDICAL, WORK, OTHER– If you have reimbursable expenses that are owed to you from your employer (such as for travel or mileage), medical claims in process but not yet paid, or other similar receivables, include them here.
- RECEIVABLES-TAX REFUNDS– You likely have no idea how much of a refund you will be getting on your taxes, unless you have just filed your taxes and not yet received the check or deposit from the IRS. Otherwise, just put in zero until we take a closer look at taxes later.
- 401(k) ACCOUNTS, IRA ACCOUNTS– For your retirement accounts you will include the current market value (not cost basis) of your accounts from your most recent quarterly statement (or look online).
- BROKERAGE ACCOUNTS– The value of your brokerage accounts is included using the same method as retirement accounts-use the current market value.
- COLLEGE SAVINGS PLANS– Use the current market value of college savings plans similar to retirement and brokerage accounts.
- INVESTMENT REAL ESTATE– If you own investment real estate, you should use Zillow or a similar website to calculating the value of your personal residence (see below).
- BUSINESS INTERESTS– If you own a small business, this number may be very difficult to quantify. The best number to start with is the equity from the financial statement of your business, multiplied by your business ownership.
- OTHER INVESTMENT ASSETS– Include the fair market value of stocks and bonds not held in brokerage accounts, as well as other investments you may have.
- PRIMARY RESIDENCE & VACATION HOME-Use a website such as Zillow for an initial estimate, but eventually you should do some comparisons to similar homes in similar neighborhoods that have sold in the last couple years. Redfin is another great website to compare similar homes. Note that you should put your full home value here and not subtract your mortgage yet (that’s in liabilities).
- AUTOMOBILES, BOATS, ETC.-A good resource for looking up your car and boat values would be Kelly Blue Book online at www.kbb.com. You may feel tempted to overvalue your car, especially if you purchased it new. Unfortunately, a car is a depreciating asset. Include the full current value, as any related auto loan will be listed below in liabilities.
- HOUSEHOLD FURNISHINGS, ART, ETC.-Furniture and possibly art are probably the most expensive large items in your home. Estimate what you would get if you were to sell these items (not the original amount paid).
- OTHER PERSONAL ASSETS-Include the current value of everything else you own-for electronics, clothing, etc. estimate the price you would get selling it at a garage sale, craigslist, etc. Let’s not overdo it on this one though (wink wink).
Now that you see how many assets you have, do a happy dance and then let’s get into the liabilities. This part is a little less fun as you see your net worth go down with each liability addition. Nonetheless-you must be honest and you must face your financial situation head-on. You’ve already set great goals and have a plan to achieve them.
Now, let’s go through the liability categories step-by-step:
- CREDIT CARDS-The credit card balances you should be including here are not only your balance from the previous statement that hasn’t been paid off, but also any credit card charges up until the last day of the quarter (for example September 30th). To get this information you will need to access your account online. Start with your last statement balance ending before the quarter end date, subtract any payments you have made between that date and the last day of the quarter, and then add all charges after the statement date up until the last day of the quarter. If you carry a balance on your credit cards, you should also calculate interest on your current balance that hasn’t yet been billed to you.
- UTILITIES-We’re getting a little nitpicky here, but if your utility costs are significant, estimate how much you likely owe but haven’t paid as of the last quarter and put that number here. An estimate is fine here, because this isn’t likely to be significant.
- TAXES PAYABLE-If you have a small business or for another reason make quarterly estimated payments, you likely have a good estimate of what you owe to the IRS at the end of the quarter. If the quarterly estimate has not yet been paid as of the date, or if you know you owe back taxes to the IRS (I’m cringing if you do!), put them here.
- OTHER CURRENT LOANS-If you have any other personal loans such as to family and friends, or owe anything to anyone else, put those amounts here.
- HOME MORTGAGE & HOME EQUITY LOAN-Your most recent mortgage statements will show the outstanding balance on your loan, as will your home equity loan statements.
- VEHICLE LOAN-Your monthly statement for your auto loans should include the total balance still owed on your loan.
- EDUCATION LOAN-Your monthly student loan statement should also include the total balance still owed on your loan.
- BUSINESS LOAN-If you have a small business and you have debt you are personally responsible for, include that here.
- OTHER LONG-TERM LOANS-Other loans that should be included at their current balance include loans from retirement accounts, life insurance policies and anything else owed to others not included in other current loans above.
Whew! That was a long list and just reading it probably took more time than you thought it should. Just. Keep. Going. Estimate some things if you just can’t find the information and move on. You can catch them next quarter.
WHAT SHOULD YOUR NET WORTH BE?
There are no set guidelines of what your net worth “should” be and based on the savings habits of many Americans comparing net worth to others may not be terribly useful either. However, here are a couple resources if you’re curious about how your net worth stacks up to others:
- CNN Money – This online calculator compares median net worth in the U.S. by age and income level. It’s simple and to the point.
- Rockstar Finance – This is a list of bloggers that share their net worth listed from $2.3 million to negative $186k net worth. Very interesting!
- Census.gov -This includes quite detailed raw data in excel format about household net worth in the U.S. listed by various demographics. Click on “Net Worth and Asset Ownership of Households: 2011” and then look at Table 1 and Table 4. This one’s for the spreadsheet lover, not for the casual net worth-er (yes, I made that word up).
EXAMPLE: THE SMITH FAMILY
The Smith family (profile at the bottom of the class here) had never completed a net worth statement before and they weren’t sure what they’re going to find. They knew about how much equity they have in their home and that they have a lot more debt than they would like. They complete their net worth statement for the last quarter in 2015 (as of December 31, 2015), shown below, and are surprised that they have over $100,000 in net worth. Upon closer look, they see that this is due to about $85,000 equity in their home (Jim & Mary bought this home in 2009 when the market crashed and they were able to get a great deal on it since he’s a real estate agent after all!) and the $20,000 in their retirement accounts.
Other things that the Smiths noted while completing this are:
- They don’t have nearly enough liquid assets, as shown by their cash and cash equivalent balances and it’s stressing them out that if they had an emergency, they would have to use their credit cards just to get by.
- Their retirement balances are lower than last time they looked and they’re getting worried about being able to retire early, or even at all, if they don’t start contributing a lot more consistently, especially since now that Mary is only working part-time and no longer received profit sharing as an employee benefit.
- Their credit card debt is higher than they even thought totaling $15,355 despite the fact that they have been trying to pay extra each month. This is something they want to focus on.
- They have two vehicles-Jim’s is worth about $5,000 and does not have an associated loan. Mary’s is worth $15,000 and they still owe $12,789. They have a 5 year loan, but would like to pay it off and the next time they buy a car they would like to pay cash. They’re tired of having debt!
- Their student loans are close to being paid off from the $44,000 initial loan amounts they had in total between their two college educations. Jim’s student loan will be paid off later in 2016 and Mary’s will be paid off in 2018, so they want to focus on other goals first before eliminating this debt. Hopefully once they pay this debt off, they will be totally debt free besides their mortgage!
- They looked up their median net worth on CNN Money and their median net worth by age (31) is $8,525 and median net worth by income level is $301,475. They feel better than before about their net worth for their age, but they definitely don’t feel like they’re wealthy, even for their age. Almost their entire net worth is in their home.
Your homework assignment is to create your net worth statement as shown in the spreadsheet preview above, using the category descriptions to help you.
- IMPROVING– Estimate your asset and liability numbers the best you can to get to a rough calculation of your net worth.
- INVESTED– Use your statements and online accounts to get the balances of each asset and liability, estimating items that would take considerable effort to find the exact balance of (such as credit card balances) and input them into the net worth statement.
- UNSTOPPABLE– Use your statements and online accounts to get the balances of each asset and liability, making sure each is as accurate as possible. After finishing the net worth statement, go back to your financial goals and make additions and corrections based on having a clearer view of your financial situation.
File your net worth statement in your Financial Plan binder under Tab 2-“Personal Financial Statements”.
HANDOUT: NET WORTH STATEMENT SUMMARY
Here’s a quick summary for you of the asset and liability categories and a quick chart you can check your net worth against based on your age.