Net Worth – The Cornerstone of Your Financial Plan

by Tax Guy - Burlington Accountant on December 20, 2010 Print This Post Print This Post

The cornerstone of your financial plan is your net worth statement. It is the starting point you use to measure your progress. If you don’t understand where you’ve started it’s hard to measure if you have been successful. It is like being on a ship without a keel: Your moving but you don’t know if it’s forward or in circles.

To illustrate this point, imagine you are planning an exotic vacation. Questions you want to ask yourself are:

  • When will the vacation start?
  • Where do I want to go?
  • What type of vacation do I want?
  • How much can I afford to spend on the vacation?

When you create your financial plan you need to ask yourself very similar questions. You’ll need to establish where you are now, where you want to be in the future, and what financial resources you will have when you get there.

By woody1778a via Flickr

Starting Your Financial Plan

Measuring net worth is like taking a picture: It is a snapshot of a point in time. The net worth statement is a snapshot of your wealth at a point of time and is used to measure your progress.

There are four reasons why you should measure your net worth:

  • To establish financial discipline
  • To create a strategy to achieve your goals
  • To measure progress towards your goals
  • To feel financially secure about your future

Use the statement to establish growth targets for your net worth. Often net worth will increase by paying down your debts or increasing your savings.

Calculating Household Net Worth

Net worth is the total fair market valueof all of your assets (house, stocks, bonds, mutual funds, GICs) less what you owe (mortgage, loans, credit cards).  (i.e. what you owe).

Getting Started With Your net Worth?

To start, pul together all of your financial records, including:

  • Latest tax records
  • Bank statements
  • Credit card information
  • Itemized living expenses
  • Brokerage statements
  • Mutual fund records
  • Mortgage documents and statements
  • RRSP & pension records
  • Loan repayment schedules
  • Insurance policies
  • Market value of any personal property

This list may appear daunting and is not by any means comprehensive.

What Does The Net Worth Statement Look Like?

Here is a sample net worth statement.

Liquid Assets

  • Chequing & savings accounts
  • Money market funds
  • Other
Short Term

  • Current bills
  • Credit card balances
  • Personal loans (the balance owing)
Short-Term Investments

  • CD’s/GIC’s
  • T-bills
  • Cash value of life insurance
  • Other
Long Term

  • Mortgage
  • Life insurance loans
  • Investment loans
  • Other
Investments (at market value)

  • Stocks
  • Bonds
  • Mutual funds
  • RRSP accounts
  • Profit sharing accounts
  • Business shares
  • Limited partnerships
  • Other
Personal Assets

  • House(s)
  • Cars and other autos
  • Personal property (i.e. your mothers antique china)
  • Other
Total Assets: $ Total Liabilities: $


Now Measuring Your Net Worth Success

Your net worth at the end of the year should be compared to the end of the previous of the year.

  • Was the growth rate expected?
  • Do you need to take steps to accelerate the growth rate or maintain it?
  • Is your net worth negative? Perhaps you need to get aggressive with debt reduction strategies.
  • Consider other ways to grow your net worth.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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