Understanding Your Net Worth Statement - For Richer Or Poorer?
February 9th, 2010 |
Did you know?
It’s not what you currently own that determines whether you’re rich or poor. Just because both my wife and I could be living in a big house in an upmarket suburb, drive two Mercedes Benz, and take our youngsters to an expensive school, does not automatically mean we’re rolling in fabulous wealth like Ali Baba of the Arabian Nights story.
Actually, there’s something else, and bank managers and other lending institutions love it.
Do you know what that thing is? I’ll tell you in a moment.
Be prepared for a shock to your system!
Well, the thing that most bank managers and lending institution love to see on their desk before they can even think of doing business with you is a financial document…actually, a financial statement, as most people like to call it.
And the name of the financial statement is…
Net Worth Statement!
What is a Net Worth Statement?
Simply put, a net worth statement is a financial document that shows your personal Net Worth (or true worth - what you’re really worth in financial terms. It is the overall balance remaining after deducting your total calculated liabilities from your total calculated assets.
The balance that remains after doing this simple math calculation is your Net Worth, or your ‘true worth!’
Hence, Balance Sheet.
Your Net Worth statement is a document which tells other people or anyone who’s interested, such as a bank manager, a lending institution, etc. whether you’re rich or poor. In other words, do you possess sufficient assets to cover your debts should you be required to pay back a loan, for example, at short notice?
Your Net Worth can also tell others if you’re moving forward, going backward, or just standing in the middle of the road of your financial life.
For example, a plus (+) amount next to your the amount (+$350 678.00) means you own more than you owe others.
Problem is IF your Net Worth shows a minus (-) amount (-$350 678.00), it simply means bad news for you. Or it means that your total liabilities exceed your total assets, and you owe others more than you currently own. And your rivals view this as another way to say your fortune is all gone… finished… kaput.
Or “He’s dead broke!”
Why did I say that?
That’s because after your creditors have sold all that you own to cover your debts, there will be no more money left to your name. And the worst part is that you will still be required to pay more of the other creditors whose outstanding accounts remain unsatisfied.
But the fact that you have a minus (-) net worth does not necessarily means all is lost. You see, most people know that life is like a roller-coaster. Sometimes, and through no fault of yours, things can go topsy-turvy on you. For richer or poorer.
And for those who are fortunate enough to know this, a minus (-) net worth is the catalyst that they require to propel them to newer heights of financial freedom.
That’s because as soon as they are faced with a problem like that, they do everything in their power to bring in more money and assets into their coffers to balance out the minuses in their net worth statement.
Still wondering why it’s called a Balance Sheet?
So the question is…
Have you looked into your Net Worth, or put aside some of your precious time to balance your assets and liabilities lately? If not, today is the right time to make sure your financial statements are a true reflection of your true wealth.
Besides, if you don’t, how will you know whether you’re moving forward, going backward, or just standing in the middle of the road of your financial life?
In another article, I will show you how to calculate your Net Worth.
2010 Andrew Molobetsi. All Rights reserved.
Andrew Molobetsi is an accredited financial planning adviser based in South Africa.
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