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Wow, nice house! They must be rich!

November 4, 2013

We all know people that live in big, beautiful (expensive) homes, drive gorgeous (expensive) cars, travel to exotic (expensive) destinations, and send their children to prestigious (expensive) private schools. They must be rich!

But are they? By all outward appearances they seem rich. But are they really as wealthy as they look?

We’ll never know for sure. The only way to tell is to take a look at their Net Worth.

Net Worth: the only way to look in the mirror

A person’s Net Worth is a simple way to know how rich they really are today– not how rich you or I think they are with their big house and fancy cars in the driveway.

Why do we say today? A Net Worth is an actual snapshot of your current finances. It’s your reality, or your bottom-line number. It says how rich you really are.

And so how do you calculate your Net Worth? It’s pretty straightforward. If you could sell all of your stuff today, pay off all the people you owe, how much would you have left over? In financial jargon, that leftover is your Net Worth.

In other words, your Net Worth = Assets – Liabilities.

Why bother?

Your Net Worth is more than just a number. It’s actually a useful financial tool that can help you measure, monitor, and manage your success (or failure!) in achieving your financial dreams.

Here’s how:

  • It measures how rich you are today by breaking down your current assets and liabilities. For example, after paying off your debts, do you have anything leftover? (Not a silly question! Lots of people live big and have little or no Net Worth!)
  • It can help you monitor your finances so you can decide where you need to make changes. By filling out a Net Worth Statement once or twice a year, you can gain better insight into whether or not your wealth is growing.
  • It can help you manage your financial resources better. How? By having a clear snapshot in front of you telling you exactly what’s happening (or not happening!), it can force you to make changes. In other words, your Net Worth can help guide your financial decisions.

Sample Net Worth Statement

If you’ve never calculated your Net Worth before you will need to begin by listing all of your assets and liabilities in a simple table called your Net Worth Statement.

Here’s an example of what a Net Worth Statement looks like:

 Net Worth Statement 
 Assets: 
House $300,000.00
Car $30,000.00
Furniture $20,000.00
Total Assets: $350,000.00
 Liabilities 
Mortgage $260,000.00
Car Loan $26,0000.00
Line of Credit $15,000.00
Total Liabilities: $301,000.00
   
 Net Worth$49,000.00

Note: If your life is simple with few assets and liabilities then you can easily use old-school tools (pen and paper) to create your Net Worth Statement. But if you have a more complicated life, then you may want to make your calculation easier by using an online tool such as our Net Worth Statement tool  that can be easily and conveniently saved in My Folder for future review and updating as your circumstances change.

Did I mention accuracy counts?

When completing your Net Worth Statement be sure to use real numbers. Don’t estimate or guess! If you use imaginary numbers, then you’re only pretending to get a handle on things.

Here are a few tips to help you quickly dig up some real numbers to punch into your Net Worth Statement:

  • If you don’t have a current market value for your home, then use the government’s assessed value on your property tax notice.
  • Don’t know what your RRSP, TFSA or RESP are worth? Then use the account’s last statement to get the real numbers.
  • What about your boat, car or RV? Don’t use your purchase cost, they‘re depreciating assets. Be realistic. Search online to find out how much you’d get if your toys were sold today.
  • Not sure how much you owe? Well, call your financial institution or mortgage planner and get a current loan statement with the actual dollar amounts.

Bottom line

Once you have real numbers punched into your Net Worth Statement, you’ll know how rich you really are and have a much better chance at getting a real handle on your financial starting point.

And the next time you drive by that big beautiful house, remind yourself that it would be nice to know what the owner’s Net Worth really is, because without the real numbers, you’ll never know the true picture. You might actually be richer than the guy with the nice house.

 

(This article was first publsihed by Troy Media)

 

Read the next article in the series - Your Net Worth Statement: the financial equivalent of a Swiss Army knife

 

Read the 1st article in the series -  76% of Canadians must be idiots when it comes to saving and planning for retirement!

 

 

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