To achieve financial freedom, you have to be able to track and hold yourself accountable to your goals.
One financial document you should review every year is your worth statement. The document is similar to an organization’s balance sheet or statement of financial position and is important because it enables you to track and be accountable for your financial goals
What is a Net Worth Statement?
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 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 $100,000.00 and the property’s market value is only $90,000, you would have a negative net worth of $10,000.00. Your personal net worth can be either a negative or positive number.
Review your Net Worth Statement Annually
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 essential to derive the actual value of using the document.
When this is done over a couple of years, you will be able to see trends and see strategies or decisions that helped improve your net worth and those that reduce your net worth.
What to Know and Avoid When using a Net Worth Statement
While the net worth statement is an important document to create and track, it shouldn’t be the only financial document you use. Using a net worth statement as the sole 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 effort into 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 that such a net worth can produce when liquidated.
As such, when it comes to net worth increases, pay attention less to gains that result from market forces rather than your decision-making.
For example, if your net worth increased by $40,000 due to an increase in your property value. While great on the surface, it should give you pause. A net worth increase that is not based on your own effort and decisions is not meaningful as it doesn’t provide you insight.
However, suppose you had a net worth increase due to a rise in your saving rate; that was a result of your decision and can be replicated.
If you initially have a negative net worth, that shouldn’t stop you from using a net worth statement. 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.
The document’s true value comes when you track and update the document annually to identify strategies that help or hinder your progress towards your financial goals, allowing you to make better financial decisions.
When it comes to increasing one’s net worth, people look for complex strategies too often. There are limited means by which your net worth can be increased.
Your net worth can increase either through asset appreciation or debt reduction. It’s that simple. You can do many things to achieve asset appreciation or debt reduction, such as paying down debt or contributing more money to your investment account.
Perhaps the most effective means of debt reduction that can automatically increase your net worth is paying down your mortgage debt.
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As advised in the book Master your mortgage: What the bank doesn’t want you to know about buying the right home, paying down your mortgage debt can be a crucial part of reaching your financial goals.
The book’s author is Brighton Gbarazia, a financial and real estate expert with over a decade of experience working for some of the largest banks and credit unions in Canada and the founder of Wealth Marathon.
You can read more articles written by Brighton at WealthMarathon, and you can learn more about his financial coaching services here.