Compiling a net worth statement might seem like a tedious task. But it’s also one of the best ways to get a clear snapshot of your financial health.

In this article, I’ll walk through a hypothetical net worth statement and discuss how to interpret what it’s telling you.

Complete a net worth statement

To put together a net worth spreadsheet, you can find many free templates online to use as a starting point. You may like to use Morningstar's printable PDF statement template for Australian households.

In this example, the net worth statement below is based on a fictional American couple, Liz and Steve Johnson. Liz is a successful corporate attorney, and Steve worked as a programmer before stepping away from his career to become a stay-at-home dad. They’ve been married for 10 years and enjoy spending time with their two young children.

What your net worth statement is telling you

Let's break down the ins-and-outs of what this statement is showing. 

Overall net worth (assets minus liabilities)

From a big-picture perspective, the ultimate insight from a net worth statement is exactly what it says: the net worth number, which is simply assets minus liabilities.

The number in isolation doesn't tell you too much, but it is a useful benchmark to track over time.

A negative net worth figure would obviously indicate room for improvement.

Debt to income ratio

To calculate your debt ratio, you'll need to add up all required monthly debt payments, including mortgage payments, personal and car loans, and credit card debt. Then take the total and divide it by your monthly gross (pretax) income.

Lower is obviously better for this number, and any number greater than 43% will likely create problems in obtaining or refinancing a mortgage.

Liz and Steve have a fair amount of debt, so focusing on paying off loans with higher interest rates will free up more cash flow that they can funnel toward other goals, such as retirement.

We discuss what's considered to be a good debt-to-income ratio in more detail here. 

Emergency fund

Most financial advisors recommend keeping at least three to six months' worth of monthly living expenses in cash or other low-risk, highly liquid assets to cover a sudden job loss or other unforeseen events, such as car repairs, appliance replacement, or other home repairs.

Some investors may want to keep closer to 12 months' worth of expenses in cash if variable pay makes up a significant portion of their total compensation.

With about $181,000 in total cash assets, Liz and Steve are in decent shape here, although they could consider transferring Steve's savings balance to a joint account so both members of the couple can easily tap into emergency funds if needed.

Single-company risk

If any one stock accounts for a large share of your net worth, that might be cause for concern.

That's particularly true in the case of employee share schemes, because it means that your human capital (your ability to generate income and earn a living) and financial capital both depend on the fortunes of one company.

Liz's hefty stake in employer stock represents a risk because it accounts for nearly one third of the couple's financial assets.

The most conservative approach is to sell off employer stock until it consumes a smaller percentage of your total assets, although that usually means paying taxes on realised capital gains.

Liquidity and valuation issues

For most assets, valuation is straightforward. But things get a bit trickier for collectibles, such as antiques.

The couple could consult an appraiser, especially if they plan to sell these assets at some point in the future.

Valuation of the gold coins should be relatively easy to update, but Liz and Steve should make sure all of these assets are both securely stored and itemized on their homeowners' insurance policy.

Why your net worth statement matters

A net worth statement doesn’t tell you everything you need to know about your financial situation.

For example, Liz and Steve would need to do more analysis to figure out if they’re on track for future obligations, such as funding their retirement.

But a net worth statement is a crucial starting point to get a better handle on your current financial picture.

Armed with this number, you can consider the following questions:

  • Is your net worth in the red or just barely positive? 
  • How does your net worth compare with what it was at this time last year?
  • How does your current debt load compare with what it was a year ago?
  • Are all of your assets adequately insured? 
  • If you're getting close to retirement, is your current net worth on track to supply you with the living expenses you need, in addition to whatever you'll receive from a pension?