“Your mind, more than your actions, determines your net worth.”
Robert Kiyosaki
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Before deciding where you want to go (artistic freedom), it’s crucial to know where you are today.
Your net worth is a metric to measure financial wellness.
Net worth ≠ self worth
Remember, it’s just a number. It does not represent your worth as a person or musician.
It’s a temporary snapshot of your financial situation. Use it as information or motivation to guide the next steps toward artistic freedom.
How to calculate
A balance sheet is the financial statement that reflects your financial situation today. It shows what you own (assets) and what you owe (liabilities).
Net worth is calculated as:
Assets – Liabilities = Net worth
This number provides insight into the strengths, challenges, opportunities and threats of your financial situation.
Download my free balance sheet (.xslx) to calculate your net worth.
What is an asset?
An asset is anything of value that can be converted into cash.
There are three asset categories:
- Current assets
- Investment assets
- Personal use assets
Current assets
Current assets are very liquid meaning you can convert them into cash quickly (within 12 months) without affecting the price of their value.
It’s important to have substantial amounts of current assets for short-term needs like emergencies, repairs and maintenance, insurance deductibles, out-of-pocket maximums, and living expenses to cover income loss or disability insurance benefit waiting periods.
Examples include:
- Cash
- Checking accounts
- Money market accounts
- Savings accounts
- Certificates of deposit (maturing within 12 months)
Investment assets
Investment assets appreciate in value toward a financial goal.
Examples include:
- Retirement accounts
- Brokerage accounts
- Education funds
- Business ownership
Personal use assets
Personal use assets maintain your current lifestyle. They are not as impactful to your financial wellness from a net worth perspective unless your intent is to sell at a profit.
Examples include:
- Personal residences
- Automobiles
- Furniture
- Clothing
- Instruments
- Recording equipment
- Vacation homes
- Collectibles
What is a liability?
Liabilities are financial obligations you owe to creditors, broken into two categories:
- Short-term (current)
- Long-term
Short-term liabilities are due in the next 12 months.
Examples include:
- Principal portion of mortgage and auto loans
- Unpaid credit card bills
- Outstanding medical expenses
- Unpaid taxes
Long-term liabilities are due beyond the next 12 months.
Examples include:
- Primary residence mortgage
- Vacation home mortgage
- Auto loans
- Student loans
- Any other loan
Make sure to include interest rates to compare debt obligations later on.
Download my free balance sheet (.xslx) to calculate your net worth.
Fluctuations
Your net worth rises as a result of your debt decreasing and asset values increasing. Examples include paying down a home mortgage or saving into retirement accounts.
| Home ownership | Debt decreasing |
|---|---|
| Value (asset) | $500,000 |
| Mortgage (liability) | ($330,000) |
| Net worth | $170,000 |
| Mortgage payoff (from income) | $30,000 |
| New net worth | $200,000 |
| Roth IRA | Asset rising |
|---|---|
| Value (asset) | $0 |
| Contributions (from income) | $6,500 |
| Net worth | $6,500 |
| Investment value increase | $3,000 |
| New net worth | $9,500 |
Other transactions have no effect on your net worth. Like purchasing a car with cash or selling your home with a mortgage.
| Car purchase | |
|---|---|
| Value (Asset) | $40,000 |
| Cash (Spent) | ($40,000) |
| Net worth | $0 |
| Home ownership | Home sale | ||
|---|---|---|---|
| Value (Asset) | $500,000 | Sale price | $500,000 |
| Mortgage (Liability) | ($300,000) | Mortgage payoff | ($300,000) |
| Net worth | $200,000 | Net cash | $200,000 |
Where to find financial information
Gather all of your documents in one place and begin inputting current values into your balance sheet.
Look for:
- Bank statements
- Retirement account statements
- Brokerage statements
- Mortgage statements
- Tax returns
- Proof of business valuation
- Property appraisals
Account ownership
Asset titling determines how assets are transferred upon your death or separation from a spouse. It’s important to review the ownership of your assets.
Ownership types:
- Fee simple
- Tenancy in common
- Joint tenancy with rights of survivorship (JTWROS)
- Tenancy by the entirety
- Community property
Annual updates
I encourage you to make annual updates and observe your progress over time. One day you will look back and see how far you’ve come.
Next steps
Review your balance sheet. Take a moment to notice how you feel.
Pride, shame, hope, guilt, fear?
Now assess the numbers.
What stands out to you? What are you satisfied with?
Not enough assets? Too many liabilities?
Remind yourself, it’s just a number. “How can I improve?”
Maybe you want to pay down your debt or accumulate more assets.
Now take that next step to improving your financial wellness.
Then get back to living your best life.
Download my free balance sheet (.xslx)
[…] calculating your net worth with a balance sheet the next step to understanding your financial wellness is measuring your cash flow using an income […]