Column: Creating A Net Worth Statement

March 15, 2020 | 0 Comments

Carla Seely Bermuda October 2018[Written by Carla Seely]

When the financial markets begin behaving erratically, most people become hyper-focused on their finances, specifically on how the current instability is impacting their net worth.

So the question must be asked – How is your financial health?

To understand better where your finances stand today and how you can start planning for tomorrow, you need to compare what you own [your assets] to what you owe [your liabilities].

Where do you start?

First, you do not need a fancy programme. A simple Excel spreadsheet will work just fine. The best way to start is to create two columns and label one Assets and the other Liabilities.

Under Assets, individually list each asset, where it is held, and how much it is worth.

For example: Bank Account [Savings] – BNTB – $100.00.

Make sure to include all your assets: bank accounts, pensions, investments, life insurance cash, real estate, personal property etc.

Under Liabilities, individually list each debt, where is it held, how much is owing, the interest rate, and the amortisation.

For example: Mortgage – HSBC – $650,000 – 6.5% – 22 years.

Make sure to include everything you owe: credit card debt, mortgage, loans etc.

When you have listed all your assets and liabilities, total each column on your spreadsheet. This will give you a complete picture of what you own versus what you owe.

The next step is most important. Deduct your liabilities from your assets, and this will provide you with your actual net worth. It is important to update your net worth at least once per year. However, in our family, we update our net worth twice a year [once in January and once in July]. For us, it not only about creating financial goals but actually having a way to measure their success.

When you update your net worth statement, you will discover three significant facts:

  • Where your assets are held.
  • How your assets are allocated.
  • How much liability is associated with your assets.

Where are your assets and liabilities held?

It is important to know exactly where each asset and liabilities is held, not just from a saving and payment perspective but from an estate planning perspective. If something happened to you, would your heirs know exactly what you have and where your assets are held? Do you have most of your bank accounts, investments and debt obligations at the same financial institution, and does that make sense? To reduce institutional risk, should you be more diversified over several financial institutions?

How are your assets allocated?

When you look at your assets, how are they allocated? Are your savings all just sitting in cash or CDs? For your investment accounts and pensions, have you diversified into different mutual funds, or do you have just one investment strategy? If your biggest asset is your home and you only have $100 in your bank account, perhaps it might be time to put more money into building cash reserves to provide a safety net and to diversify your net worth.

How much liability is associated with the asset?

It is important to know exactly what you owe, and it is even more important to set a goal to pay off that debt. For most people, when you purchase a home, you acquire a mortgage, and, over the next 25 years, you make your monthly payment to the financial institution. Make sure you only borrow what you can afford, and make sure you can comfortably afford the monthly payment. The goal is to make sure you have additional monthly savings as, long term, this will help you to create well-diversified net worth.

There is no right or wrong answer to how your net worth should be allocated. However, two elements should be incorporated.

  • 1. Make sure your assets are well-diversified
  • 2. Pay off your debt.

- Carla Seely is the Vice President of Pension, Life and Investments at Freisenbruch-Meyer. If you would like any further details, please contact her at cseely@fmgroup.bm or call +1 441 297 8686.

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