Before you can start mapping out your goals, you should know where you stand. This way, you know how to get to where you’re going. When you’re preparing to travel, your starting point is your home. To get to your dream vacation spot, you know that you need to ride a taxi to get to the airport and from there, you will be flown to your point of destination. Upon landing in the airport, you will also need to decide how you will get to your hotel before you can finally enjoy your vacation.
When it comes to your personal finances, your net worth is your starting point. In simplest terms, your net worth statement is a list of your assets minus your liabilities. Your assets are the things you own that have value while your liabilities are your debts. When you subtract your liabilities from your assets, you get your personal worth. You can come up with a positive value or a negative one. It doesn’t matter. For now, what’s important is that you know where you stand.
How do you come up with your net worth statement? It’s a simple process, really, although it can be a bit tedious. You can use the old paper and pencil or your computer for this. You simply need to create two tables—one for your assets and the other for liabilities.
For the assets section, list down everything you own that has value. List them down even if you are still paying for them. If you are still paying mortgage for your house or your car, these are still considered assets. Put the current market value that they have today. The same goes for stocks, bonds, and other investments you may have. You can check how much your investments are worth at present by going back to the net worth statements that your brokerage firm has given you.
As far as insurance policies go, they can be included in your list of assets if they have cash value should you cash it today. Those that don’t accumulate cash value are not considered assets. Of course, savings and money market accounts, cash you have in your safe, furniture, paintings, appliances and gadgets, among others are also assets.
You should also include as assets money that you expect to collect. If you own a rental property, for example, and expect a monthly rent and/or have a small business which gives you modest profit, include these in your list.
Everyone has liabilities. Even the world’s richest have them. Credit card debts are just a start. Include your mortgage, car loans, child support, and alimony. Student loans are also considered liabilities. And don’t forget the tax man. Taxes that you pay on your real estate properties as well as your quarterly tax obligations are considered liabilities. And that $100 you owe to your best friend? Yes, include that, too.
Once you have all your assets and liabilities listed, total each of them and as we have mentioned earlier subtract the liabilities from your assets. The figure you get is your net worth. If it is positive, well and good. That means that you can focus on increasing it. If it is negative, don’t lose hope. Now you know that you need to work towards paying off your debt and/or increasing your income before you can start building your wealth.
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