A net worth statement (a.k.a., balance sheet) is a tool that shows your financial position at a given point in time. It is like a "snapshot" that shows the dollar value of what you own and what you owe. This relationship can be stated as: Assets - Liabilities = Net Worth. Net worth is the dollar amount you would have if all your assets were sold today for their current market value and all your debts were paid in full. For example, if assets total $500,000 and you currently owe $50,000, your net worth today is $450,000.
To calculate your net worth, first determine the value of everything you own. In other words, what would your assets would be worth if they were sold today to a willing buyer? If recently purchased, the purchase price of your house, farmland, or other real estate can be used. Otherwise, consult a real estate agent or appraiser to get a quote on the value of the property if you were to sell it now, or check recent sales of similar properties.
For personal possessions such as vehicles, household furnishings, and electronics, the value is more difficult to determine. Most of these items lose financial value (depreciate) from the day of purchase. Consult newspaper classified ads or visit garage sales or online sales websites to see what they sell for. For life insurance, list only "cash value" policies (i.e., the cash value that you could borrow from a policy today). For investments, such as stocks and mutual funds, check the financial pages of a newspaper or a financial website, or call your broker for current prices. In the liabilities section of a net worth statement, list the dollar value of debts such as mortgages, credit cards, and personal or farm business loans.
What does a net worth statement tell you? Obviously, if liabilities exceed the value of assets (negative net worth), you need to take corrective action immediately. However, even a person with a high net worth may have financial difficulties. Having many assets with low liquidity (i.e., an inability to immediately convert assets to cash) may mean not having adequate cash available to pay for emergencies or current expenses if income suddenly decreases. Having an updated net worth statement can be helpful when making financial decisions. In addition, most loan applications require the financial data that appear on a net worth statement and having one can speed up the loan application process.