Have you ever heard the phrase “asset rich, but cash poor”? It’s easy for people to fall into the trap of owning a ton of stuff while still struggling to pay the bills. There’s another extreme, too: that of having no problem paying bills when they come due, but also not building the sort of wealth that leads to a secure and comfortable retirement, or maybe leaving something for the next generations or a cause you believe in.
One way to pursue that happy medium of liquidity and growth is by putting your assets and debts down on paper and tracking your progress over time. A net worth statement categorizes what you own and what you owe by their purposes and how liquid they are–or, for debts, when they come due. Some call a net worth statement a “statement of financial position,” but, no matter what it’s called, it’s a snapshot of your finances that lets you know where you stand and helps you assess your financial strengths and weaknesses.
The net worth statement is divided into three parts: assets (what you own), liabilities (what you owe), and net worth. Your net worth is your assets minus your liabilities.
What you own
Your assets are listed on the left column of your net worth statement in the rough order of how easily you can cash them in to cover emergencies or take advantage of opportunities. First comes liquid assets, which are cash and cash equivalents such as money market accounts. Next comes invested assets. It’s a good idea to categorize retirement assets separately if there would be a penalty to withdraw from them. Lastly comes personal use assets, such as your home, car, and personal items. Collectibles fall into a gray area; you’ll have to decide whether they were bought as investments or for personal enjoyment.
What you owe
It’s more fun to list what you own than writing down what you owe, but knowing what you owe is arguably more important. Liabilities go on the right side of the statement and, like assets, are listed roughly in the order they come due. Short term liabilities, such as credit cards are on top, while mortgages and business loans might be listed last.
If you bought something on credit like a car or home, you’d list the asset’s current value in the left column and the loan balance in liabilities. Let’s say you buy a house for $500,000 with $100,000 cash down (congratulations!). You should subtract the $100,000 down payment from your liquid assets, add $400,000 to your personal use assets, and then put the mortgage balance of $400,000 in your long-term liabilities.
At the bottom of your liabilities, skip a couple of columns and subtract your total liabilities from your total assets. That is your net worth. Not as a human being, mind you, but your financial position at the moment. Is it growing or shrinking? Are you too heavy in personal use assets or maybe too much in cash? Financial planners have all sorts of tools and ratios to analyze where there are opportunities and risks. But even taking the first step of putting everything down on paper will provide you some terrific insights.
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 6260 Lake Osprey Dr. Lakewood Ranch, FL 34240. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries. These opinions are based on Evan R. Guido observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 11/14/2024 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. You cannot invest directly in an index. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. CDs are FDIC insured and offer a fixed rate of return. They do not necessarily protect against a rising cost of living. The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value. Other investments are not insured, and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested. Neither diversification nor asset allocation assure or guarantee better performance and cannot eliminate the risk of investment losses. This information is intended to be educational and does not reflect any particular investment or investment needs of any specific investor.