If you go to the bank to get a mortgage or open up a line of credit, chances are the bank will ask you to complete a net worth statement. The net worth statement is important to the bank because it is a way to measure your ability to take on debt by understanding how much you are worth. To the bank, the more wealth you have, the more debt they are likely to give you.
The net worth statement not only tells you how much you are worth but the details of the net worth statement can also give you a lot of insight on how to get ahead financially.
Your net worth is equal to all of your assets less all of your liabilities. Under your asset, you are likely to include some common financial assets like your RRSPs, investments, and real estate. These are all examples of good sound financial assets. Financial assets are generally assets that appreciate in value and thus are productive to your financial future.
Some assets on your net worth statement are really assets that will be passed on to your heirs. For example, Jilly has a jewelry collection worth $70,000. The collection has significant sentimental value because some of it was passed down a number of generations and the goal was to pass it to future generations. In Jilly’s example, the jewelry collection clearly has financial value and should be included in her personal net worth but it really represents her estate asset.
Jilly had a brother Beck who also has a collection worth $70,000. Beck collected rare comic books and has a few really valuable pieces. Beck has different intentions for his collection. He hopes it will be worth a lot of money in the future so he can sell it and retire. For Beck, he sincerely believes his comic book collection is an example of a retirement asset because it will be used to create retirement income in the future. Other more common examples of retirement assets are RRSPs, investments and rental property.
Jilly and Beck have another brother Jacob who does not collect anything. Instead, Jacob owns a $70,000 car. Like many North American’s he takes a lot of pride in owning his car. In fact, Jacob’s wife would argue that his car is more important to him than she is. Is Jacob’s $70,000 car an asset? Most people will and should include their cars on their net worth statement but the problem with most cars is they are depreciating assets. In other words, they are counterproductive to wealth because they depreciate in value. Cars therefore are generally not good financial or retirement assets but rather what I call lifestyle assets.
Lifestyle assets are generally fun and may be important to living a good life but generally, they are not productive financial assets.
My two cents
As the old saying goes, “It’s not how much money you make that counts. It’s what you do with your money that counts.”
The net worth statement is not just important for tracking your wealth but it also helps you to understand what you should do with your money. To increase your financial wealth, you need to put your money into productive financial assets. For retirement planning, you need to put money into assets that will create retirement income in the future. To provide an estate, then put your money into things that will create a bigger estate.
Although lifestyle assets are fun, they are not typically productive to your financial future. If you want to be more prosperous and wealthy, where are you going to put your money?