Editor’s note: This is the first article in a monthly step-by-step guide for getting your financial house in order. Yes, it’s a daunting process, but we’re breaking it down into manageable steps that you can take each month until the task is done. For April, we’re tackling your personal net worth statement. In May, we're covering how assets are titled and naming beneficiaries.
A personal net worth statement lists your assets and liabilities and provides a clear picture of your financial health. It is a great tool for setting financial goals and can help show you where to focus, whether it is saving for retirement, building your investment portfolio or coming up with a plan to pay off your liabilities.
It will also help your loved ones immensely should anything unexpected happen where they need to understand what you own and what you owe.
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You can use a spreadsheet or even a simple list to name your assets and the estimated value of each of the following:
- Bank accounts
- Investment accounts
- Insurance policies
- Business interests
- Homes and vacation properties
- Charitable accounts (including donor-advised funds or trusts)
- Revocable and irrevocable trusts
- Meaningful personal property (car, jewelry, art, antiques)
- Anything else of value
You should also document your liabilities and the outstanding balances, including:
- Credit cards
- Mortgages
- Car loans
- Student loans
- Medical bills or accounts
For every line item, we recommend including the account number, balance and other relevant information, such as the name and contact information or the adviser, broker, lender, etc.
You will want to make sure that at least one trusted person, such as a spouse or adult child, has access to your personal net worth statement and possibly even your computer or document storage system.
Your personal net worth is calculated by subtracting your total liabilities from your total assets. Importantly, this is not a static number. It changes as market values fluctuate and as you acquire new assets or pay down debt.
Next steps after creating your net worth statement
Once your net worth statement is complete, take a moment to reflect on what it reveals. You may find that your total net worth is higher or lower than you expected, or there may be areas where you need to improve.
Either way, it’s a great opportunity to set actionable financial goals for the rest of the year. Here are a few ideas on how to use your net worth statement to move forward:
Set financial goals. Whether your goal is to save for retirement, reduce debt or save for a major purchase like a house or education, your net worth statement can help guide where to focus your attention.
Invest for the future. If you have extra assets that are not working for you (e.g., cash sitting in a low-interest savings account), you may want to consider diversifying your investment portfolio for long-term growth, such as contributing to your retirement accounts or exploring other investment opportunities.
Review your insurance coverage. After reviewing your net worth, you may realize that you need more or different insurance coverage, whether for home or property, life or disability.
If you have meaningful personal property, such as an art collection, fine jewelry, collector cars or antiques, you should have those insured to protect these assets in case of unforeseen events.
Estate planning. If you have not already done so, now is the time to start thinking about your estate plan. A net worth statement will help you identify the size of your estate and what can be inherited by beneficiaries if you were to pass on. We will be covering estate planning in another article as part this series.
Revisit your financial plan annually. Make it a habit to revisit your net worth statement and adjust your financial plan each year to ensure it reflects your evolving needs and goals.
Life events like marriage, the birth of children, career changes or a move to a new home or state can affect your net worth and financial priorities.
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While putting together your personal net worth statement may feel like a chore, the benefits are significant. It allows you to have a better understanding of where you stand financially and provides the clarity needed to make informed decisions about your future.
It also provides a foundation for your estate plan. As you accumulate assets over time, you need to make sure you are incorporating those into your wealth transfer strategy.
In our next article, we will focus on why it is important to review the titling of your assets and any associated beneficiary designations so you can ensure that your assets are protected and transferred according to your wishes.
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