Have you ever applied for a loan and been told you need to provide a personal net worth statement? Did you have one ready? A personal net worth statement is an important tool that shows the financial health of an individual at any given time. They’re sometimes called balance sheets or financial statements. Even if you’re not looking to borrow money anytime soon, creating a personal net worth statement can be beneficial.
What Is a Personal Net Worth Statement?
A personal net worth statement shows your net worth, which is your assets minus your liabilities. It shows what a person has in cash if they sold all their assets and paid off all their debts.
By creating a personal net worth statement, you can get an accurate overall look at your financial status. You’ll soon have a clear idea of what can be simplified, eliminated, or combined. The overall view provided by a statement like this will help you measure the progress of your financial goals.
How to Create Your Own Personal Net Worth Statement
The key to an accurate net worth statement is to be as complete as possible and resist the urge to overvalue your assets. We’ve outlined a few simple steps you can take to create your own personal net worth statement.
Step One: Categorize Your Investment Assets
On the left side of a page, list your assets and the value of each. Use subcategories within the assets column to see which can be combined or simplified. Subcategories can include cash, investment assets (taxable accounts), retirement assets (401(k)s, IRAs), cash value of insurance policies, business ownings, real estate, and personal assets (market value of home, vehicles, jewelry, etc.).
Step Two: Identify and Track Long-Term Liabilities
On the right side of the page, list your liabilities and the value of each. Liabilities can include things like mortgages, a home equity line of credit, car loans, student loans, tax debt, alimony or child support, or outstanding credit card debt.
Step Three: Calculating Your Current Financial Baseline
Calculate your net worth. To do this, subtract the amount in your liabilities column from the amount in the assets column:
NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES
We’ve included a sample personal net worth statement for you to use as a reference. (Click here)
Case Study: Turning “Net Worth” into “Retirement Security”
In this ficticious example, a pre-retiree couple felt financially prepared for retirement, given their combined net worth of $3 million. Two years before retirement, they worked with a financial advisor to develop a sustainable withdrawal strategy. The outcome underscored that while total savings matters, how and when those funds are held and withdrawn is just as critical.
- The Challenge: While reviewing their personal net worth statement, we found a large portion of their assets was held in a tax-deferred traditional IRA, making them vulnerable to sequence-of-returns risk if markets declined early in retirement.
- How Blankinship & Foster can Help: Our team can provide strategies to create greater withdrawal flexibility:
- Gradual Roth Conversions: A large IRA balance with future required minimum distributions (RMDs) could significantly increase their taxable income, affecting income-based thresholds for certain tax benefits. Gradual Roth conversions during low-income years can help to reduce their IRA balance and future RMDs and provide a source of tax-free growth and income later.
- Leveraging Taxable Brokerage Accounts: Shifting additional assets into their taxable brokerage accounts can help to cover short-term needs and avoid relying heavily on tax-deferred withdrawals during a potential market downturn.
- Adjusting Asset Allocation: Increasing the allocation to safe assets, such as savings and checking accounts, helps by providing easily accessible liquidity and cover up to three years of expenses. Maintaining an appropriate mix of long-term, growth-oriented investments can help fund the later years of retirement.
- The Outcome: By organizing their assets in a personal net worth statement, pre-retirees can identify risks and develop a more sustainable, tax-aware strategy for retirement withdrawals, significantly reducing their portfolio longevity risks.
Using your Personal Net Worth Statement for Long-Term success
Your personal net worth could be positive or negative, and tracking it over time is an important step in attaining long-term financial success. A negative net worth isn’t ideal but is no reason to throw in the towel, either. Over time, your personal net worth should be on an upward trajectory; your wealth should increase with careful management and wise decision-making. While personal net worth is just a number and only one part of your overall financial picture, it is a good way of seeing the bottom line and knowing where you stand. Perhaps you’ll see financial habits emerge and can course-correct to improve your net worth down the road.
Meet with a wealth management advisor at Blankinship & Foster to review your personal net worth statement. A financial expert can assess your overall financial health, analyze the liquidity of your assets, and help you put together a debt reduction or investment plan. We also help pre-retirees and retirees use a net worth statement to inform income planning, tax decisions, and sustainable withdrawals. Using this “zoomed out” take on the health of your finances, together you can appropriately plan for the future, reach your goals, and keep track of progress. There’s power in seeing your total financial picture. Create your own personal net worth statement and see if you’re heading in the right direction!
Frequently Asked Questions: Personal Net Worth Statements
- What is the difference between total net worth and liquid net worth?
Total net worth is your total assets minus your liabilities, whereas liquid net worth includes total assets that provide easily accessible liquidity without delays or early withdrawal penalties. Liquid assets typically include cash from savings and checking accounts, money market funds, and other assets that are readily accessible for emergencies or short-term needs. Examples of illiquid assets include equity in your home or business and retirement accounts with early withdrawal penalties.
- How often should a high-net-worth individual update their net worth statement?
We recommend our clients review their personal net worth statement at least once a year, but other events could trigger an update, such as changes in income, buying or selling a home, getting a divorce, or approaching retirement, among other life changes and milestones.
- Should I include my primary residence in my net worth calculation?
Including your primary residence in your net worth calculation can give you a clear picture of your total financial position. However, we recommend a separate statement that excludes your home from retirement planning, as it’s an illiquid asset that may not generate income and could skew your retirement targets.
- How does a net worth statement help with sequence of returns risk?
Rather than just looking at your total asset balance, a net worth statement clearly outlines where your assets are held, how they are taxed, and how they can support your retirement income. If a large portion of your assets is market-correlated, you could face sequence of returns risk that could make your long-term income unsustainable if there is market volatility. With proactive planning based on your net worth statement, you can identify opportunities and make adjustments to reduce your risk.
- Is a net worth statement the same as a budget?
A net worth statement and a budget are not the same. A net worth statement is a high-level view of what you own and the liabilities you owe. A budget dives further into coordinating your income and expenses to manage your cash flow. Both are valuable planning tools.
