Net Worth Statement

October 26, 2005

NOTE: This is a reprint from a series I did on my old blog.

Financial planners typically use two financial statements to get a handle on a person’s current financial status. Those statements are: the net worth statement (also called the statement of financial position) and the cash flow statement (also called a budget). Today, I’ll discuss the net worth statement.

Most people are familiar with following equation:

Net Worth = Assets – Liabilities

or, as it looks on a balance sheet or net worth statement:

Assets = Liabilities + Net Worth

Looking at the above equation, you can see that as long as a person’s assets are greater than their liabilities, they have a POSITIVE net worth. For example, say that all you have is a house that is worth $100,000 with $70,000 still owed on the mortgage. Assuming that you have no other assets or liabilities, your net worth equation would look like this:

$100,000 = $70,000 + $30,000

So, in this really simple example, your net worth is $30,000 since the house is worth $100,000 and you only owe $70,000. Now, what happens if you make a payment? (Once again, I’m really simplifying this example but the theory is still the same). Let’s say you make a $1,000 payment, of which 100% goes directly towards paying off the mortgage. How does this affect your net worth?

$100,000 = $69,000 + $31,000

Since the value of the asset side (the house is still worth $100,000) doesn’t change, the other side of the equation must adjust to reflect the payment. Since we are assuming that 100% of the $1,000 payment went towards the mortgage, the liabilities decreased to $69,000, which means the net worth portion had to increase to $31,000 to balance out the equation.

With my next post, I’ll show some more example of different transactions and their effect on the net worth statement.

8 responses to Net Worth Statement

  1. Instead of “Assets = Liabilities + Net Worth”, I think you mean ” ASSETS + Liabilities = Net Worth”.

  2. No, I think they mean Assets minus Liabilities equals Net Worth. Which, algebraicly, is the same thing that they said above.

  3. Under Assets, I would apply a stricter definition:
    True Assets are those producing income.
    If it’s not producing income, it’s likely just a depreciating item which may or may not be producing expenses.

  4. The equations all have a sign error for liabilities, because the value of them is actually negative.

    Networth = Assets + (Liabilities)
    Assets = Networth – (Liabilities)
    = Networht + |Liabilities|

  5. Net worth is an ILLUSION. Pls don’t use or count on your net worth.

    Just have a cash goal.

Trackbacks and Pingbacks:

  1. AllFinancialMatters » Blog Archive » How to Determine if You Are “Wealthy” - March 5, 2007

    […] Your Net Worth Statement Part I […]

  2. AllFinancialMatters » Blog Archive » What’s Your RON (Return on Net Worth)? - March 5, 2007

    […] Your Net Worth Statement Part I […]

  3. 4 Steps To Staging A Financial Intervention - April 16, 2009

    […] of their behavior.  This includes investment statements, credit card bills, bank statements and anything else you can use to build a solid […]