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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:

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.

Topics: Financial Planning, Net Worth Statement | 8 Comments »


8 Responses to “Net Worth Statement”

  1. EZ Says:
    April 21st, 2006 at 8:16 am

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

  2. JMD Says:
    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.

  3. Will Says:
    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.

  4. AllFinancialMatters » Blog Archive » How to Determine if You Are “Wealthy” Says:
    March 5th, 2007 at 11:20 am

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

  5. AllFinancialMatters » Blog Archive » What’s Your RON (Return on Net Worth)? Says:
    March 5th, 2007 at 11:23 am

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

  6. PK Says:
    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|

  7. 4 Steps To Staging A Financial Intervention Says:
    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 […]

  8. Financial Samurai Says:
    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.

Comments