Let's take an example and
look at what somebody's balance sheet might actually look at.
Joe has just graduated from collage, he plans to start a new job in a month.
But before he starts working, he thinks he'd like to have a really a good picture,
remember a snapshot, of what his assets and liabilities look right now.
And he wants to calculate out his Net Worth, so
he starts out by listing his assets everything from his cash in his wallet.
The exact amount he's got in his accounts.
He has a car, that's a used car, so he puts that down.
And then he thinks kind of looks around,
see what else that might actually add up if he sold it.
Things like guitar, clothing, furniture, computers, whatever,
all these different things.
And when he adds up all the monetary value, the value at that day,
he comes to over $7,500.
So then the next side is, of course what he owes somebody, his liabilities.
And there we see that he's got a little bit in a credit card bill that,
that college loan that loan he took out for college.
That's really going to be a big chunk for him in over 15,000 and
then a few other little things.
So his liabilities total 15,000, in almost $15,700 let's say, rounding there.
Now remember, to calculate his Net Worth he has to take his assets and
subtract his liabilities.
And in this situation, he has a negative net worth of over $8,000.
That's not unusual for somebody in his position, in his life stage.
We really do see often that when people start out as young adults, and they're
just starting to work or haven't worked very long in really a full-time job.
That they'll have a negative Net Worth, that's not necessarily a problem, but
of course we want to see that change over their lifetime and
to see that network go to positive and keep going.
So let's take a look at how that might be because there's
actually kind of a life cycle stage for Net Worth.
And when we look at the graph, you'll see that this graph actually shows
the median value of assets for households by age.
And as you can see, people's Net Worth tends to start out pretty darn low, and
then it grows increasingly as their career progresses, as they make more money.
Typically, people make more money,
have that salary increases as they get more experienced and
then it'll grow until probably they retire and then what happens?
We start using that money that we've accumulated and that curve will start to
go down and that's the typical life-cycle stage that you would see.
Now, of course other things can affect Net Worth.
Things like medical costs that are large or
assisting children with college costs, unemployment.
All these things can impact net worth, but
this is just sort of the curve that we might anticipate.
So remember, calculating your Net Worth annually is a strategic financial tool
that you can use to see where you are now and to measure your progress over time.
And that can be very helpful as we move forward in financial planning.
So what have we talked about today?
We said that a balance sheet is really a snapshot
of your current financial situation.
Then we went on to say that in order to really utilize that balance sheet,
you can then calculate your Net Worth.
You can subtract the liabilities from your assets and
find out your net worth at that time.
And remember, it might be negative the first time you do it and
worry about that too much, because you're just starting out in your financial life.
But remembering to do once a year,
I tend to like to do kind of when all my tax documents come
in because I've all that financial paper work out can really be a positive.
It's very fun to watch it grow over time and to measure your progress.