Of all good things financial — a paid-off credit card, a Tax-Free Savings Account (TFSA), a financial plan — my favourite is a net worth statement.
Before you dismiss me as being full of baloney, why not take a couple of minutes to see if I’m onto something that could help you? I’ll start with the benefits of a net worth statement, which is basically a summary of what you own and what you owe, then describe how you go about drawing one up.
My net worth statement makes me feel:
- More responsible. It removes the guesswork about how we’re doing.
- More certain. I know which scary economic headlines to ignore.
- More successful or more humble — depending on how our investments are doing.
- Like a better partner. It gives my wife and me a mutual understanding of our shared financial situation.
It helps me see:
- The big picture of our finances
- If we’re withdrawing more than 4% of our money as annual retirement income
- If we have enough “liquid” money easily accessible for a rainy day
- How much we owe
- If we’re keeping up with inflation or investment benchmarks
My net worth statement has also affected a couple of important decisions (neither of which I’m suggesting is right for you). We decided to put non-registered investments in my wife’s name for tax reasons, and we could predict the advantage of downsizing our home, which let us retire early.
How to create your own net worth statement
You can use grade-school arithmetic (don’t be intimidated!), a calculator or spreadsheet software. I use a spreadsheet because I can easily update the balances from the last time I calculated our net worth, then let the computer do the math. It should take one or two hours.
- First, check all of your most recent account statements or online balances. It should take less than an hour.
- Next, list and total your assets: the balances of saving/chequing accounts, registered retirement savings plans (RRSPs), Tax-free savings accounts (TFSAs), non-registered investments, Guaranteed investment certificates (GICs), mutual funds, pensions, approximate value of your house, car, furniture, jewellery and other major possessions.
- Then list and total your debts: credit card balances, line of credit, personal loans, mortgage, etc.
- Then subtract our debts from our assets … and that’s your net worth.
- When you’re done, look at the numbers. What are they telling you? Is there something you should do differently? We share our net worth statement with our financial advisor, because it can hint at issues or opportunities we haven’t recognized.
I’ve found that creating categories creates insights: How does my home equity compare to my investments? How much can I withdraw from accounts tax-free? What percentage of my assets is locked in? What’s in my name, and what’s in my wife’s name?
I created our first net worth statement 10 years ago. I was finding our financial affairs were getting busier and more complex (read How many financial services accounts do you need?). I thought that the occasional look at our financial big picture would change our thinking. And it has; I only wish I’d started earlier. I think it would have helped us in those years when the big financial question was: “Should I pay down the mortgage or save for my retirement?”
Now, I’d like to hear about your favourite financial thing. I welcome your comments below.
More personal finance tips:
- Five financial planning milestones
- Three types of plans you need for your money
- How to make your financial plan work for you
- The do’s and don’ts of debt
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