Everything You Own, Everything You Owe: A Beginner’s Guide to Net Worth
Building on last week’s theme, today I’m tackling the second personal finance admin task we should all be doing to kick off the New Year: updating out annual net worth statements.
I know, I know. I always promise to make personal finance more fun, flirty, and friendly, yet here I am hitting you with two admin-tasks in a row. Please don’t banish me to the spam folder. I swear I’ll be back with something more exciting next week.
If you already have a net worth statement, you can stop right here. Just block off some time this weekend to update it and bask in your brilliance. Huzzah! If you don’t have one yet, you’ll be ready to make one by the end of today’s article. Let’s get you sorted.
If you google ‘net worth statement’, one of the top-of-page definitions is this:
A calculation involving subtracting all liabilities from all assets. An asset is anything owned that has monetary value. Liabilities are obligations that deplete financial resources.
Join me for a moment to ponder what exactly that tossed-word-salad is supposed to mean. I already know what a net worth statement is, and after reading that even I’m confused. Allow me to translate:
Your net worth is everything you OWN minus everything you OWE.
It looks like this:
Net worth = Assets - Liabilities
That’s it. An annual net worth statement is just a document that lists the value of everything you own (cash, savings, retirement accounts, real estate, car, etc.), subtracts the value of everything you owe (credit cards, mortgage, student loans, lines of credit, unpaid taxes etc.), and shows you the result.
Why is it important to create a net worth statement once a year? Two reasons:
1. It lets you track your financial progress over time.
2. It’s incredibly helpful for your loved ones if anything ever happens to you.
Let’s break each down.
1. Track your progress over time
Forget trying to keep up with the Joneses, when you keep a net worth statement you get to compete with someone far cooler: your past self (major Monica Geller energy). Keeping an annual record lets you see the story of your financial progress over the years: investments going up (hopefully), debts going down (also hopefully), and all those daily choices adding up to something meaningful.
Managing your personal finances throughout your lifetime can feel like slowly climbing a mountain, step by step. When you’re inevitably stuck in the clouds half way up, you can’t see how far you’ve come. But looking back over a few years of net worth statements? Suddenly you realize you’ve been making real progress.
2. Make life easier for the people who love you
In the words of Benjamin Franklin, “In this world, nothing is certain except death and taxes.” Having a clear net worth statement can help you with both.
Someone you love will almost certainly outlive out, and clear financial documentation is one of the kindest things you can leave behind. As you record your assets (savings, investments, life insurance, mortgage balance etc.), take a little extra time to include helpful details like: which institution each account lives at, account numbers, contact information for advisors or brokers, and anything else your people will need.
Otherwise, you risk leaving your loved ones hunting down mystery crypto wallets and secret insurance policies like they’re in a much more morose version of National Treasure. Nobody wants that.
How to create your net worth statement (a quick tutorial)
Create a Word doc or Excel sheet. (Pro tip: name it something you’ll actually find later. Not ‘NetWorth_FINAL_final_REALone2.xlsx’)
List the value of all your assets (cash, savings, investments, pension cash-out value, real estate, car, valuable items like art of jewelry, etc.)
List the value of all your liabilities (credit cards, mortgage, student loans, personal lines of credit, business loans, taxes owing, car loans etc.)
Subtract liabilities from assets. This is your net worth. Highlight it.
Add notes your loved ones would need to access this information someday. Share a copy with a trusted person.
Update this document once a year.
Quick reassurance: If your net worth is negative right now, you’re not behind, hopeless, or banned from the personal finance table. Most people start there. It’s very normal in certain stages of life. The point isn’t to worry about the number today, it’s to watch the trend shift over time.
And that’s a wrap! This whole exercise should take you less than an hour. It may feel basic today, but ten years from now you’ll sit down to update it again and suddenly realize just how far you’ve come. That’s a very cool moment, and I’m excited for you to experience it.
As always, feel free to hit reply if you have questions or want clarification.
See you next Friday,
- Cory