Good morning friends!
Last week, we talked about how you need to combine the powers of a budget with the snapshot of a personal net worth statement to better understand how much you earn, what you need to save, and what you can spend each year. In simple terms, your personal net worth statement defines where you are now and where you want to be in the future, while your budget is how you are going to get there.
What is a Personal Net Worth Statement?
A personal net worth statement (PNW) is your own personal balance sheet, or a way to showcase what you own and what you owe to others. If you add together everything you own and subtract everything you owe to others, the difference will be your personal net worth.
Below, I'll discuss which assets and which liabilities I think you should include in your PNW statement.
Things I Include in My Personal Net Worth
In general, I recommend being conservative when including the things you own in your PNW statement.
In accounting, we often talk about materiality: a threshold at which point an item is worth including in your analysis. If an item is immaterial, it's generally not worth your consideration. You could say "anything valued less than $500 isn't worth including." Maybe $1,000 is the number. You pick how detailed you want to be.
By applying a materiality concept to your PNW statement, you'll automatically build in a conservative aspect to your PNW statement.
This should work in tandem with your own gut feeling — if you question whether it makes sense to include an asset in your PNW statement, maybe you shouldn't include it.
Why be conservative? Because it's safer to undervalue your personal net worth when building your financial plan or when applying for a loan. It's worse to say you own something when you don't than it is to say you don't own something when you do.
Assets to Include
I like to include all monetary assets in my PNW statement, regardless of whether they are material or not. This includes:
- Cash and near-cash assets (something like a gift card, for instance)
- Savings accounts, including any TFSA, RRSP, or non-registered accounts
- Investment accounts, such as your stock market portfolio
- Pension plan assets you've contributed, or the death benefit value of any pension your estate would receive should you pass
- Your portion of retained earnings inside any business you may own
- Your portion of unincorporated partnership assets or the balance of your unincorporated partnership account
Monetary assets should be included in your PNW regardless of materiality. The reason: Monetary assets are generally easy to measure — more often than not, there will be a piece of paper or a document (like a bank statement) that specifically states you own that monetary asset.
If you own your home, you should always include the value of your home on your PNW statement. I think it's best to use the appraised value of the home, as this is the value the bank will use when deciding how much to lend you.
All other real estate should be included as well. Rental properties, land held for development, farmland, and other forms of real estate should always be included in your PNW statement. These are especially important when tying your PNW and your budget together.
I once heard you should include insured assets on your PNW statement. I don't disagree with the idea of including insured assets on your PNW statement, but there are some hiccups, as I'll discuss below. This could include assets like:
- Collectibles or antiques
- Computer hardware and equipment, such as laptop computers, camera equipment, audio equipment, etc.
- Other equipment like trailers, boats, recreational vehicles, campers, etc.
The value you record these items at should be your best guess at a conservative fair market value. If you were to turn around and sell your laptop computer tomorrow, how much do you think you'd receive for it? That potential selling price is the amount you should include on your PNW statement if you insist on including these items on your statement.
Liabilities to Include
Every single liability you have — every single thing you owe to someone else — should be included in your PNW statement. This continues the trend of being conservative in your valuations and ensures pure transparency of your net worth if the bank asks you for your PNW statement.
Liabilities can be wide ranging, but they include:
- Mortgages for your principal residence or any other real estate
- Loans, including bank loans, vehicle loans, personal loans, family loans, etc.
- Lines of credit
- Credit card debts, including all store credit cards
- Trade payables, such as invoices you owe to companies that you still need to pay for
Make sure you know the interest rates, payment amounts, and balances for all your liabilities. This is fundamental for ensuring your PNW statement and your budget to work together.
Things I Don't Include in My Personal Net Worth
After monetary assets and real estate discussed above, you may consider leaving things off your PNW statement for conservative reasons. You may have spent $1,000 on really nice dishes, for instance, but I don't think these types of items are worth including.
Again, why? Because I don't think you could turn around and sell used dishes for all that much.
Though I discussed a rule of thumb earlier regarding insured assets, I personally tend to stay away from many of the following types of assets:
- Camera equipment, computer equipment, televisions, and other home appliances
- Loans advanced to others which I don't fully anticipate of collecting
There are many other things I tend to leave off: personal assets like bicycles, hot tubs, clothing, etc.
Three factors help me determine whether an asset is worth including on my PNW statement:
- Can I properly measure the value of the asset? — If I have to take a wild guess at the asset's value, I don't include the amount.
- Can I resell the asset once I'm finished with it? — If I intend to keep the asset forever or if the asset has no selling value once I'm done with it, I don't include the amount.
- Will I receive the amount in the future? — For pension assets, for instance, the value you'll receive if you live a long time will differ greatly from the amount you'll receive if you pass away early. At most, I include the amount I'm guaranteed to receive.
How to Structure Your Personal Net Worth Statement
Structuring your PNW statement is actually quite easy:
- Create an "Assets" subtitle
- Underneath, create a "Cash and Investments" header
- List your assets and sum them up
- Create an "Other Assets" header
- List your assets and sum them up
- Create a "Liabilities" header
- List your liabilities and sum them up
- Find the difference between your assets and liabilities
That's your personal net worth right there. Simple.
If there's one consideration to be made here, it's to be consistent — be consistent in what you include in your PNW statement and be consistent in how you value everything in your PNW statement. If you randomly add in vague assets that are hard to value, you'll provide yourself a crutch to meet your end-of-year personal net worth goals.
Crutches are never good.
With the advice noted above, go ahead and measure your own personal net worth at this very day. Don't include things you will receive in the next week. Simply create a list of your assets and a list of your liabilities — including their values — as of this very date.
Once finished, take a look at that personal net worth number.
This is your starting point.
Next, multiply that number by 10%.
This number represents how much you should shoot to improve your personal net worth in the next year. At minimum. Shoot for 20% if you feel confident in your saving and growth abilities.
Next week, I'll discuss how your budget can help you move your personal net worth from where it is today to a 10% increase by the end of the year.
It'll be easier to achieve that growth than you think.
Here's to a happy and healthy week ahead.
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