We’re still in the first phase of building our financial plan – Get Organized – but are now moving on to the second step. This step looks at your net worth. You probably already know, but for those who may want a refresher, net worth is simply all of your assets (money, investments, property) minus everything you owe (mortgage, loans, credit cards).
Step 2 – Net Worth
It helps to break down net worth into sections. Then we’ll start grouping them together, and ultimately end up with your net worth statement. Here’s an example of what one might look like:
Assets
Cash
I won’t spend much time on this one, as it’s pretty straight forward. It should consist of any cash or cash equivalent funds you have. This would include your checking, savings, & money-market accounts as well as bank CDs. If you have other cash, say… under the mattress, you can include it as well. The important part is that it is accessible.
Invested Assets
Just like it sounds, this section comprises all of your investment-type of accounts. This can be further broken down into two categories: qualified and non-qualified. Qualified simply means that it qualifies for tax advantages (so think retirement accounts).
Examples of qualified investment accounts include: 401(k) or 403(b), IRA, Roth IRA, SIMPLE, SEP, Cash Balance plans, HSA, etc.
Examples of non-qualified accounts would be brokerage accounts, company stock, or your crypto wallets.
Real Estate Assets
If you own any properties, including your primary residence, then list them here. You’ll want to list them for what your best guess is as far as current value. Unless it was a recent purchase, don’t just go by what you paid, and I find that tax estimated values can be pretty far off. Rentals, land, commercial property, etc. all get listed here. Don’t worry about your mortgages yet, we’ll add those later.
Business Interest
It won’t apply to everyone, but another item is business value if you’re a business owner. Now, many small business owners don’t necessarily have formal valuations done, so it might be hard to come up with. There are general rules of thumb out there for doing this that can get you in the ballpark. Working with an advisor or specialist in this area would get you a lot closer to its likely value. Similarly, if you’ve invested funds into a business venture, I like to add it here.
Other Assets
This is generally the catch-all of other assets you own – including physical assets. It is up to you as far as what else you want to include here. My rule of thumb is only include things that are either significant in value or are being held as something that would appreciate (think classic car collection for instance). I’ve even had clients include their gun collections before, or physical gold/silver they had at home.
A Note on Liquidity
I often look at this list of assets in two broad categories of liquid and illiquid assets. Liquid simply means that it can be turned into cash very quickly (particularly without a significant loss of value in doing so). Cash is the most liquid asset. Brokerage accounts are also liquid in that you can sell stocks and have the cash in a matter of days. There’s also no penalty for doing this. Retirement accounts are somewhat liquid in that the investments can be sold easily, but depending on your age, there may be penalties for early withdrawals from these accounts. Finally, real estate and business interests are illiquid.
Liabilities
Liabilities:
- List out all the debts that you have – both short and long-term. Thing that I see often are:
- Credit Cards
- Personal & Unsecured Loans
- Auto Loans
- Student Loans
- Mortgages
- Home Equity Loans & HELOCs
There are other types of liabilities as well such as money you owe a family member or back taxes. I put those in a “Other Liabilities” category. 401(k) loans and funds borrowed from cash value insurance policies shouldn’t be counted against you twice. If you’ve already excluded the loan amount from the value of the account, you don’t need to record thema gain, though you should at least make a note if you are planning to pay them back.
Balance Sheet
Once you’ve listed out all of your assets and liabilities, you should now have a balance sheet that looks something like this:
Net Worth
By subtracting your total liabilities from your total assets, you’ll calculate your current net worth.
This gives you a snapshot of how you’re doing on your wealth building journey at a particular time. Knowing and tracking your net worth allows you to see your progress over time. Saving, investing, and paying off debt all contribute to growing your wealth and net worth over time.
At this point, you should have a good idea of your annual cash flow as well as the current status of your net worth. These are the building blocks for the planning we’ll do down the road. You may already see some things that stand out that need to be addressed. Even if you don’t, we’ll dig into these later in the process to find ways to optimize them based on your goals.
Before that, we need to finish phase one of Getting Organized. The third part is about organizing your protections – insurance and estate.
