The Swiss Army Knife of Your Financial Documents
Similar to the famous Swiss army knife, if you set up your net worth statement correctly it can be used for a surprising number of purposes. The net worth statement is a core part of your financial plan and a key financial document. The statement tracks your assets, your debts, and how much wealth you've accumulated to date. This information can be helpful in purchasing the correct insurance, developing an estate plan, managing debt, and achieving your life goal.
A sufficiently-detailed net worth statement should include all of your assets, including personal property and retirement accounts--not just major assets like houses and cars or liquid assets like checking and investment accounts. Your net worth statement should also includes a listing of all of your debts, whether they be big debts such as a mortgage, revolving debts like credit cards, or personal debts such as the thousand bucks you borrowed from your parents.
Revisit Your Net Worth Statement
If you haven't revisited your net worth statement recently, pull it out and update all of the numbers. Look up the current values of all your assets, including personal property. In addition enter the current values of your retirement accounts, investments, and savings. Finally update your debts to their current balances. Many use their net worth statement to help them get a clear perspective of their current financial position.
Other Uses for Your Net Worth Statement
But don't stop simply at understanding your finances--you can use the net worth statement to help you with many other aspects of your financial plan.
Spring Cleaning & Simplification
As you read the directions, you may have felt overwhelmed by the idea of valuing all your personal property and looking up all your accounts. This could be a sign that you have too much stuff or your finances are overly complicated. Use the update to your net worth statement as an opportunity to review your possessions and identify things you don't care about, at least not enough to look up their current value. Consider selling those items and using the cash to help you with other financial goals.
Similarly, if your financial accounts are spread across dozens of financial institutions, the pain you feel updating your accounts should spur you to simplify your finances. Many people collect quite a few 401 (k)s over their career, and managing four or five separate accounts can become difficult, especially as you approach retirement. Use this opportunity to roll some of them over to a single IRA that you have control over. Do the same thing if you have multiple bank accounts at different institutions. You may have set some of those up strategically to achieve a specific goal, but others accounts may have outlived their usefulness.
Schedule of Assets
Anyone who's ever had to make a claim against their homeowners or renters insurance policy for personal property can tell you the insurance company will ask for a 'schedule of assets' or a 'home inventory.' This document lists off all of the personal property that was damaged or lost in a fire, theft, or other covered loss.
If you take the time to list every item of value on your net worth statement, it will work very handily as a schedule of personal assets. In the event of a loss, you can easily deliver your net worth statement to your insurance company without any additional work or effort.
Checklist for Personal Property Floaters
Another insurance use of your net worth statement is as a checklist for personal property items that you need an additional rider to cover. Many homeowners' insurance and renters' insurance policies have limits on the value of the personal property that can be covered under the policy. And high-value items like original art and expensive jewelry are almost never covered. As a result, to cover high-value personal property, you need a rider added to your insurance called a personal property floater.
Look up the coverage limit for personal property in your insurance policy and any exclusions listed. You can then use your net worth statement as a quick checklist of items that you need an additional rider to cover. The values you've researched for the items become an easy way to determine whether or not you need a separate personal property floater to cover them.
Just don't fall into the trap where you think just because something isn't covered, that means you should cover it. My wife and I don't have insurance coverage on her engagement ring. Our thinking: if the ring gets damaged or stolen, we'll just buy a new one. And it might be a convenient excuse to upgrade.
Estate Plan Cheat Sheet
In the event of your death, your net worth statement can be a quick and easy reference for your executor in managing your estate. You can even use it personally to make notes on who you want to get which assets. This doesn't replace a fully-executed will and/or trusts, but it can help reduce the cost of developing your estate plan.
Anytime you meet with your estate planning attorney you should bring an updated net worth statement with notes on it. Handing this document to the attorney can save a lot of time reviewing and recording assets with your attorney--making the meeting shorter and lowering your attorney costs.
Debt Payoff Tracker
One of the most valuable uses of your net worth statement is as a method of tracking your current debt and how well you're doing paying it off. If you are on a debt-payoff regime, your net worth statement can be invaluable to keeping motivated. Continually updating your net worth statement means that not only will you see the debt number falling, but you'll also be watching your net worth increasing! Watching the impact your debt payments are having on your net worth can be integral to keeping motivation high in a debt payoff plan.
Debt-Asset Linking
One of the many characteristics that separate good debt from bad debt is whether or not the debt financed an asset, especially an appreciating asset. Your net worth statement can be a handy way of linking your debt to your assets simply by drawing a line connecting the debt you have and the asset the debt purchased.
Linking your debts and your assets can give you a much better understanding of how you acquire debts, which can help you make better decisions about loans and avoiding unnecessary debt. Drawing the link between the assets you own that were financed through the debt can also provide clarity on whether you would consider the debt a mistake.
And of course, if you can't connect a debt to an asset, it will become very clear that the debt is doing nothing to improve your financial position. Debt that isn't linked to an asset is one of the largest drags on your ability to build your net worth over time.
Life Goal Tracker
Moving up to the savings and investments portion of your net worth statement, your list of liquid assets can help you visualize your progress toward life goals. If you name your savings and investment accounts after the life goals that those accounts are intended to help you achieve, the account balance can serve as a progress bar for your goals.
Say you named one investment account "Home Down Payment." If you are want a $100,000 down payment for the home, a quick math calculation will give you percentage you have achieved toward that goal. For each of your goals, your net worth statement can easily show whether the goal is 75%, 50%, or 90% accomplished.
Priorities Gut-Check
Probably the most valuable and underutilized use of the net worth statement is as a gut-check for whether or not your money is being spent according to your priorities. A quick look at your net worth statement can tell you how much of your assets are tied up in cars, jewelry, savings for vacations, or education funds for your children. If the value of the assets on your net worth statement don't align with the values and priorities in your life, it's time to reevaluate how you're spending your money and executing on your financial plan.
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