Archived — You and Your Money (5)

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Net Worth — Another Tool

A net worth statement shows you the strong and weak points in your current financial situation. It is also a way of keeping score. By comparing statements over the years, you can easily see if you are making progress toward your financial goals.

Preparing a net worth statement (See chart)

Your net worth is the amount of money you would have left if you cashed in everything you own and paid off all your debts. Be as accurate as possible as you complete the chart. Net worth statements should be prepared on a yearly basis.

  • If you have near-cash assets that can be cashed in before they mature, record their present value — that is, their face value plus accrued interest. For other near-cash assets, list their face value.
  • To find the market value of corporate bonds, common shares and mutual funds, consult the financial pages of the newspaper. Call your broker if an item is not listed.
  • Use the tables in life insurance policies to calculate their current cash values, or call your agent. Note that not all insurance policies have cash surrender values.
  • Contact the appropriate company or financial institution to ask how much money you would receive if you cashed in your RRSP.
  • If you have a pension plan at your work place, talk to someone in your personnel office. He or she should be able to tell you how much cash you would receive if you quit the plan.
  • It is difficult to put an accurate market value on a home, property and collectibles. Of course, you can hire an accredited appraiser to do an evaluation, but this can be expensive. To value your home and property, you can usually find out the asking price for similar properties in your area. Remember, though, that the asking price is rarely the final selling price. Some real estate agents offer a free market evaluation service. When you call for an appointment, tell the agent the reason you want an evaluation done.
  • Check the classified ads in the newspaper to find out the asking price for cars similar to yours. Remember that the asking price is usually higher than the final selling price. You can also look in one of the guides to used car prices. The Canadian Red Book and the Gold Book of Used Car Prices, usually available in libraries, show average prices for specific models based on recent sales.
  • It is also difficult to determine the value of home furnishings and recreational equipment. Although you may have paid a lot of money for these items, there is often no market for them. Do not write down what you paid for them. Estimate how much money you would receive if you sold these items. Be conservative.
  • Do not overlook any assets. Think carefully. Do you supply your own tools or equipment at work? Do you have an annuity? Make a list of these items and attach it to your net worth statement for future reference.

The amount of money you owe is usually easy to calculate. Check your latest statements to find out how much you owe. If they are not available, contact the lenders and ask how much it would cost to pay off the debt in full. Unpaid bills, such as rent or utilities that are due or past due, should be included in your net worth statement. Do not include bills that you know you will have to pay in the future but have not yet come due (e.g. next month's rent or your car insurance that is due four months from now).

Using your net worth statement

What does your net worth statement tell you about your current financial situation? Are you comfortable with the amount of money you owe compared to what you own? If you are not, what changes will you make? Is too much of your money tied up in depreciating assets such as cars and household furnishings? If so, what can you do to change the situation?

Are you pleased with the amount of money you have in savings such as your RRSP, term deposits, Canada Savings Bonds? The whole idea behind preparing the statement is to identify the strengths and weaknesses in your current situation, then make plans to maintain the strengths and reduce the weaknesses.

Now, think ahead. What do you want your net worth statement to look like next year, in 5 or 10 years, or in 25 years? When you retire? These are just other ways of defining your financial goals for the future. Comparing net worth statements over the years will help you confirm that you are making the progress you planned.

Taking charge of your finances seems like a lot of time and trouble, but money management never goes away. Acquiring the skills now will pay off well into the future.