Use the Net Worth Worksheet included online at www.self-counsel.com/updates/after55/bonus.htm as Worksheet 2 (Sample 2 at the end of this chapter is an example of this worksheet,) to complete your financial snapshot today.
Knowing Your Dollar Value
You can find out what you are worth in dollar terms today simply by taking stock, at fair market value, of everything of value that you own (that is, your assets), and subtracting from that number everything you owe (your liabilities, or debts). The difference is your real worth, or net worth today. A net worth statement shows how well off, financially, you are at a given moment. It not only identifies your assets, but also states their fair market value and the forms in which they exist. Likewise, your liabilities and the nature of these obligations are also identified and valued.
Assets less liabilities equals net worth. For example, if your house on December 31, 2003, is worth $200,000 and has a mortgage balance of $150,000, your net worth at that point in time is $50,000. That’s the difference between what you own (the house at $200,000) and what you owe (the mortgage at $150,000).
Now, let’s progress a year into the future. You are now valuing your net worth on December 31, 2004. The process is the same, but the values will likely be different. The fair market value of your house may have increased to, say, $225,000. Your mortgage, however, has decreased to $145,000 (due to your diligent payments). Your net worth on December 31, 2004, is $80,000. That’s the difference between $225,000 and $145,000. In summary, you’ve increased your net worth by $30,000 in just one year!
Ideally, your net worth should be growing as you age. To achieve this growth, you must increase your assets and/or decrease your debts. It is a good idea to calculate the change in your net worth at least once every year to measure your progress or setbacks. Depending on your income and spending patterns on retirement, a percentage of your net worth should be used to continuously generate investment income to —
• supplement your retirement living,
• supplement your long-term care,
• grow your net worth,
• leave an estate for your loved ones, and/or
• leave a legacy on death to support your favorite charties, humanitarian agencies, and/or religious organizations.
Running the Numbers
To calculate your own net worth, use the Net Worth Worksheet you’ll find online at www.self-counsel.com/updates/after55/bonus.htm. Later on, you will use the information from your Net Worth Worksheet when completing the Income-Producing Investments Worksheet, Cash Inflow Worksheet, and Yearly Spending Budget Worksheet, all of which are discussed later in this book. It’s a good idea to also revisit these worksheets yearly, re-assess your financial situation, track your financial changes, and make any necessary revisions to your budget and lifestyle.
If you are part of a couple, record both your own and your spouse’s assets and liabilities. Any items in both names are recorded as joint assets or liabilities.
If you’ve never done it before, the following section shows you step by step how to complete your household’s own net worth statement. You can make the process fairly painless for yourself by following these steps:
Step 1: Prepare yourself
1. Find a quiet, well-lighted work space.
2. Print out the Net Worth Worksheet form you’ll find online at www.self-counsel.com/updates/after55/bonus.htm.
3. Have a calculator, a pencil, and an eraser ready for your calculations. (You may choose to complete the Excel version of the Net Worth Worksheet available online or print the PDF version and fill in the form by hand.)
4. Gather together the following, if applicable:
• All your most current bank statements.
• All your most current broker and investment account statements.
• All your most current retirement savings account statements.
• All your most current pension account statements.
• All your most current credit card statements.
• All your most current bank, car, and other loan statements.
• All your most current mortgage statements.
• Your life insurance statements, including cash value balances, if any.
• Your long-term care insurance papers.
• Your critical illness insurance papers.
• Your prepaid funeral arrangement papers.
• An itemized listing of your property and valuables with their fair market value. (Separate the listings by type, such as furniture, antiques, jewelry, furs, coin collections, china, crystals, silverware, etc.)
5. Get an accordion-style folder for storing your statements and other papers.
Step 2: Sort out the paperwork
Take a close look at all the papers you have gathered. Sort them into two piles — an “Asset” pile and a “Liability” pile. If you are part of a couple, make additional asset and liability piles for items in your spouse’s and joint names.
The “Asset” pile will comprise papers that show the value of the things you own (for example, your investment account statements, the cash value of your life insurance statements, and your itemized listings of valuables). The “Liability” pile will comprise papers that show the value of your debts (for example, your credit card statements, your mortgage statement, and bank statements for overdrawn accounts).
Step 3: Date the Net Worth Worksheet
It is important to record the date for which your net worth was calculated, because when you calculate your net worth again at a future date, you’ll be able to make comparisons and measure the progress you’ve made or any setbacks you’ve suffered. (You will use this same date again when you fill out the Income-Producing Investments Worksheet.) Note that the date you put on the worksheet is not the actual date on which you did the work; rather, it is the date on which your net worth is based. It is best to pick a date such as December 31, September 30, June 30, or March 31, as these are dates on which most financial institutions provide information on your bank and investment accounts.
Step 4: Fill in the asset values
Complete the “Asset” items and fill in the applicable values on the worksheet, using all available account statements. You may round the values to the nearest one hundred dollars to simplify your calculations.
For items such as your home or your car, for which there are no statements, estimate their fair market value based on your knowledge of the current market and the economy. Fair market value means what you think you can sell them for today. Use the most recent appraised value or, in the case of your home, check with your local realtor. You can use the newspaper’s
