Major financial decisions such as purchasing a home or taking out a business loan often require us to provide a statement of our current financial situation. This helps the lender or other interested parties in these transactions analyze their risk by obtaining a glimpse into an individual’s or business’s financial health. Unless prompted by an event that requires a statement of net worth, however, the average person typically does not take advantage of the benefits of this “big picture” view of his or her fiscal condition.

Assets

An asset is anything you own that has value. As a list of assets is created, it is important to be honest about their true value. You can get as specific or as simple as you would like. One approach to avoid getting overly tedious is to keep a list of the major items or accounts that have a true intrinsic value, and then place all other assets into a category called “personal items.”

Liquid assets are cash or cash equivalents. This category contains all of your cash, checking accounts and savings accounts. Any emergency fund that you have should be very liquid in nature. This gives you quick access to the asset to handle urgent situations if they do occur.

Invested assets are accounts or items that are typically held on an intermediate or long-term basis. Retirement accounts, CDs and real estate investments (not including your primary residence) are a few examples of what would appear in this section of your financial statement. The value of many of these invested assets is constantly changing, so it is important to revise this category often to have an up-to-date statement of net worth.

Use assets are anything you own that gets regular use. In this section, provide a fair market value for your home, vehicles and personal items. It is not necessary to take into account any outstanding loans you have on these items. That will be covered under liabilities.

Liabilities

Liabilities include everything you owe. This includes, but is not limited to, real estate loans, credit cards, auto loans and lines of credit. As a next step, note three pieces of information that can help you strategically eliminate some of your debt listed under liabilities: 1) Payoff amount. 2) Minimum monthly payment. 3) Rate of interest.

Now, it is time to calculate your net worth:

Your Net Worth = Your Assets – Your Liabilities.

Don’t get discouraged if your net worth is negative. You are not alone. So many Americans find themselves in this position, but completing this financial statement and calculating your net worth is the first step in creating a plan to break free. Next time (March 15) we will discuss a few debt-elimination strategies. These strategies are not just for those who have a low or negative net worth, but for anyone who wants to chisel away at some or all of the debt they have accumulated.