One financial document you should be reviewed on a yearly basis is called the net worth statement. The statement is similar to an organization’s balance sheet or statement of financial position. The document is important because it enables you to track and be accountable for your financial goals.

How to Calculate Your Net Worth

An individual or family’s net worth is a snapshot of the household’s assets and liabilities at a particular time. To calculate your personal net worth, add up the current market value of all your assets (savings, chequing, property, investment, etc.) and subtract that figure from all your liabilities or associated debts (mortgage, loans, etc.). The difference between the two numbers is known as your net worth. For example, if you have a mortgage for $100,000 and the property’s market value is only worth $90,000, you would have a negative net worth of $10,000.

What to Know About Net Worth Statment

Since a net worth statement is only a snapshot of your financial picture at a particular time, it should be reviewed and updated yearly to track your progress over time. Continuous tracking and updating are important to derive the document’s real value. When this is done over a couple of years, you will able to see trends and see strategies or decisions that helped improve your net worth and those that reduce your net worth.

What to Avoid when Calculating Your Net Worth

While the net worth statement is an important document to create and track, it shouldn’t be the only financial document you use. The use of a net worth statement as the only financial document for financial goal tracking can create the wrong mindset.

An individual with a high net worth might be asset-rich but cash-flow-poor. Having a large net worth looks good on paper, but the reality is all of us live our daily life on the cashflows we are able to produce.  This concept is often missed as people put an unbalanced amount of their effort towards asset accumulation. A $1 million net worth means nothing if you are not prepared to liquidate (sell) the assets you own to turn them into a liquid cash flow stream or if the million-dollar asset produces a monthly cash flow.

A negative net worth shouldn’t stop you from making a net worth statement. In fact, if you have a negative net worth, this is the perfect time to start tracking your progress over the coming years. Be consistent in tracking and updating your net worth on an annual basis. Its true value comes in you tracking and updating the document often to identify strategies that help or hinder your progress so those behaviours can be corrected.

Often when it comes to increasing one’s net worth, I find people look for complex strategies too often. At the end of the day, your net worth increase either through asset appreciation or debt reduction. It’s really that simple. You can do a whole bunch of things to achieve asset appreciation or debt reduction but don’t forget simple investing and paying down debt is also pretty good strategies. Don’t make things complex if it’s not required.

Lastly, here’s a net worth statement template from Vertex 42, one of my favourite excel sites, to help you get started. Feel free to share any comments or questions about the net worth statement in the comment section below.