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Net Worth Statement – Part II

By JLP | October 27, 2005

Yesterday, I began a new series called “Financial Planning Basics” and started with a post about the net worth statement. Today, I’ll take the net worth statement a little further and show some various transactions and their effect on the net worth statement. While studying these examples, keep in mind the net worth equation:

Assets = Liabilities + Net Worth

Example One

Withdraw $5,000 from your savings account to pay for a vacation:

Assets = Liabilities + Net Worth
-$5,000 = No Change + -$5,000

Example Two

Withdraw $5,000 from savings and charge $2,000 to your credit card to pay for a new dining room suite:

To reflect the withdrawal from savings and the additional liability on your credit card:

-$5,000 = +$2,000 + No Change

To reflect the addition of the dining room suite to asset-side of the equation:

+$7,000 = No Change + No Change

Those are a couple of examples to illustrate the accounting involved with net worth statements. With my next post, we’ll dive a little deeper into net worth statements.

Topics: Financial Planning, Net Worth Statement | 5 Comments »

5 Responses to “Net Worth Statement – Part II”

  1. WiZe$mAkEr Says:
    May 15th, 2006 at 1:54 pm

    Assets – Liabilities = Net Worth

  2. JLP Says:
    May 15th, 2006 at 1:56 pm

    I based my equation on the way it looks on a balance sheet with assets listed on the left and liabilities and net worth on the right.

  3. Russ Says:
    October 14th, 2006 at 8:17 pm

    In Example Two you don’t say what happens to the withdrawal from savings. If it’s being spent on the vacation as it was from Example One then there is a change in Net Worth.

  4. bill Says:
    August 9th, 2007 at 11:00 am

    What is a net worth? I depends on whether it’s a basketball net, a volley ball net, a fishing net or what you net after deducting all expenses from your source of income. All joking aside, I follow a very simple concept to increase my net worth: spend less than you make and set aside some for emergency and some for retirement. This has served me well throughout my life.

  5. debt free Says:
    February 14th, 2008 at 10:45 am

    I, too, set aside for emergency and retirement and then live off the rest. It’s tough sometimes, but I know the payoff in the long run is worth it.