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Net Worth Statement
By JLP | 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:
or, as it looks on a balance sheet or net worth statement:
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:
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?
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.
Topics: Financial Planning, Net Worth Statement | 8 Comments »
April 21st, 2006 at 8:16 am
Instead of “Assets = Liabilities + Net Worth”, I think you mean ” ASSETS + Liabilities = Net Worth”.
October 7th, 2006 at 1:54 pm
No, I think they mean Assets minus Liabilities equals Net Worth. Which, algebraicly, is the same thing that they said above.
October 27th, 2006 at 9:44 pm
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.
March 5th, 2007 at 11:20 am
[...] Your Net Worth Statement Part I [...]
March 5th, 2007 at 11:23 am
[...] Your Net Worth Statement Part I [...]
July 17th, 2008 at 4:02 pm
The equations all have a sign error for liabilities, because the value of them is actually negative.
Therefore,
Networth = Assets + (Liabilities)
or
Assets = Networth – (Liabilities)
= Networht + |Liabilities|
April 16th, 2009 at 4:07 am
[...] of their behavior. This includes investment statements, credit card bills, bank statements and anything else you can use to build a solid [...]
October 17th, 2009 at 1:03 am
Net worth is an ILLUSION. Pls don’t use or count on your net worth.
Just have a cash goal.