A net worth statement is a financial tool that shows your financial position at a given point in time. It is like a “financial snapshot” that shows the dollar value of what you own and what you owe. This relationship can be stated as: Assets – Liabilities = Net Worth.
What does a net worth statement tell you? Obviously, if liabilities exceed the value of assets (negative net worth), you need to take corrective action immediately. However, even a person with a high net worth may have financial difficulties. Having many assets with low liquidity (inability to immediately convert assets to cash) may mean not having adequate cash available to pay current expenses if income suddenly decreases.
Having an updated net worth statement can also be helpful when making financial decisions. Most loan applications require the financial data that appears on a net worth statement. Having a copy can speed up the loan application process. If you are overloaded with consumer (non-mortgage) debt, calculating your net worth can highlight the importance of debt reduction to improve your financial position.
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