Many of my fellow bloggers draw up their net worth statements and update us regularly on their progress. While checking your net worth every month is probably overkill, it is a valuable exercise to go through once every year, preferably on a particular date (personally, we do this on December 31st).
The net worth statement is a fairly simple document. You simply list all your assets (bank accounts, investments, RRSPs, cars, real estate etc.) and subtract all your liabilities (loans, credit card balances, mortgage etc.). It is important to note down the current value of your assets, so don’t forget to depreciate your car’s value and conservatively estimate your home’s current value.
Like some other financial topics (RRSP vs. mortgage, nest egg vs. cash flow), the assets that should be included in the net worth statement are a source of endless debate. I think that you should add everything that you are reasonably sure could be converted to cash (at a minimum your autos and your house). In drawing up our net worth, I do not include household articles, but you might have valuable antiques or jewellery that could be included.
Your current net worth statement gives you a snapshot of how you stand financially. And, as you track your net worth for a few years, it gives you a good idea of how well you are progressing toward your financial goals.
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26 responses so far ↓
1 Jon D. // May 16, 2007 at 9:55 pm
There’s some great Excel templates available at the MS office website, plus they’re free. Just do a search for “net worth calculator” and they’ll come up.
2 Canadian Capitalist // May 17, 2007 at 7:41 am
Jon: Thanks for the tip. I found a nice calculator on the Excel website. Here it is:
Link
Ignore the Template download problem, scroll down the page and click “Download now”. Works for Excel 97 and later versions.
3 ThickenMyWallet // May 17, 2007 at 9:41 am
What valuation are you using when you value your home? The acquisition cost or market value?
4 Canadian Capitalist // May 17, 2007 at 9:59 am
I use the approx. current market value and discount it by 6%. So, if a similar house to ours sold for $250K in our area, I’ll use $235K as our home’s value. I don’t use the acquisition cost because a net worth statement should reflect current value of assets. So, it is also important to depreciate auto values appropriately.
5 Canadian Dream // May 17, 2007 at 11:03 am
CC,
I like that idea of just using market value and correcting a set % downwards. I’ve been trying to come up with a way to handle that in my net worth statements. Thanks for the idea.
CD
6 GIV // May 17, 2007 at 12:45 pm
the assets that should be included in the net worth statement are a source of endless debate
There’s an understatement. Personally, I’m wary of including things like household items, because as you said, it’s really meant to track things that you could turn into cash if necessary. Sure, I could probably sell my couch, but I’m still going to need to buy a new one, presumably.
RRSPs, stocks, etc. are legit assets because they can be capitalized relatively quickly to turn into new investments or cover expenses if the good times temporarily stop rolling.
It’s the same reason that people who trumpet how rich they are because of house appreciation make me laugh. That’s great that your house has appreciated from $400,000 to $1-million within 5 years in tony Vancouver. But if you sell, you’re going to buy another place in a market you know first hand is red hot. If you move from one million dollar home to another, what have you really made?
7 Mike // May 17, 2007 at 12:57 pm
I have to admit that I don’t keep track of net worth anymore. I just don’t find it that useful for anything, although it can be fun if it’s going up.
The comment about about reducing the house value by the estimated commissions, raises the point that almost all of your assets will have some sort of fees, taxes applied if you sell them. Real estate is pretty easy to estimate the fees (but impossible to accurately estimate the sale price).
However, what about things like rrsps? If you have $100k rrsp and you sell them all tomorrow, then how much would you net? What if you were unemployed for 3 years and sold them off slowly over 3 years? How much would you net in that case? Or what if you save them for retirement as planned and take them out slowly? My point is that there is no standard way to measure the net value of things like rrsps and capital gains.
8 Canadian Capitalist // May 17, 2007 at 3:05 pm
Mike: I actually discount home value by 6% to keep my estimate conservative, not to account for realtor commissions. I know some people calculate the liquidity value of their assets, but personally I don’t bother. What I am looking for is not how much money we’ll have if we just sell everything. I am more interested in seeing how we are doing against our goals (pay off the house, save for retirement, kids’ education etc.). Therefore, a net worth statement is very valuable. It tells us how much is outstanding on the mortgage (its great to see that balance decreasing every year) , how well our savings are growing etc.
9 Aleks // May 17, 2007 at 4:40 pm
I’m much more conservative on my net worth. I don’t include my car because I don’t consider it an asset, it’s more like the couch example. I doubt I will ever live for any length of time without a car, so any money I could get from selling it would be used (and then some) to buy a new car. My brother and I also own some recreation property that we’re hoping will sell for over $200,000. However, until it does sell I don’t consider it an asset. It’s not something I can liquidate quickly, seeing as how it hasn’t sold up until now.
I think I would just as conservative with my house, when I buy one. I’ll probably just take the purchase price and adjust for inflation, then subtract the mortgage balance. I want my net worth to reflect my true net. A house is much like a car, and once I buy one I doubt I’ll ever go back to renting, so large paper gains in house value aren’t really meaningful. A net worth of $1 million excluding my home would mean I can retire today, whereas owning a $1.3 million home with a $300,000 mortgage means I am up to my eyeballs in debt.
10 FinancialJungle // May 17, 2007 at 5:28 pm
Here’s my take. A car, a couch, and a house is no different than a $1 million dollar income generating portfolio.
You sell a car, a couch or a house, you still have to find a replacement. If you sell your $1 million portfolio, you also have to replace it with another $1 million investment to maintain the income stream.
Needless to say, you need the car, the couch and the house during retirement as much as you need the $1 million portfolio.
There is no rule written that you must own your house to retire. I for one sold my Vancouver home and living quite well as a renter, and receiving a handsome dividend income stream from the proceeds to cover my rents. I think people living outside of Vancouver don’t appreciate just how over-priced our real estate is. Let me put it this way. The rent yield in Vancouver is LOWER than the 5-year mortgage rate. Something to chew on. By leaving your home out of the equation, you’ll never realize that there are better ways to deploy your capital.
11 Phil S // May 17, 2007 at 6:17 pm
To Financial Jungle: I’ve heard Vancouver real estate is much worse than Toronto now where I’m living. But you have to also consider things on an after-tax basis. If you are in a high tax bracket then the dividend income stream from the proceeds of the sale of your house is similarly taxed at a very high rate. However, if you own your house, it would be equivalent to earning a dividend yield equal to your rent (minus property taxes, condo fees, etc) on a tax free basis.
For me, I pay $400 a month condo fees and maybe $100 a month property taxes as compared to about $1000 a month in rent for an equivalent place. For me to pay $1000 a month on an after-tax basis, I have to almost earn twice that in my tax bracket. In comparison, my condo fees and property taxes amount to $500 which would be a pre-tax earning of about $1000. I paid $145K for my condo. So to use round numbers, if I had a stock yielding 5% dividend pre-tax, then that would be $7250 a year, or maybe $3625 a year after-tax. Since that’s only about $300 a month, then I’d still be paying $700 a month out of my own earnings. So, for me to be paying $500 a month out of my own earnings means that I’m still ahead by owning instead of renting by $200 a month on an after-tax basis.
That’s the evils of our high income taxation environment that we have in Canada!!!
12 FinancialJungle.com // May 17, 2007 at 6:54 pm
Hi Phil S,
dividends aren’t taxed at marginal rate because the government is giving you dividend tax credits back.
If I’m in the 30% tax bracket, not only do I receive the $7250 in full, I also receive a small tax refund. I’ve written a few posts on dividends in my blog.
13 Phil S // May 17, 2007 at 7:12 pm
Yes, yes, the gross-up then dividend credit down calculation which wipes out OAS for the elderly. For me, it didn’t seem to matter that most of my 2006 investment earnings were capital gains and dividends, I still got killed on my tax return. I maxed out my RSP in a lump sum contribution and still almost had to pay tax last year! Yikes!
Anyways, those were just round numbers in my calculations. My point is to consider things on an after-tax basis, because the way that our personal income taxes are structured, the government is working really, really hard to discourage people from saving and investing! I’m a working slob in the marginal tax bracket and I get slaughtered year after year on taxes. It’s very difficult to get ahead in this country unless you own a business to write off all your expenses against. Working stiffs like me just never get a break, so in some cases, the home can be kind of like a tax shelter of sorts in the way that you can avoid rent in high-rent cities.
14 Aleks // May 17, 2007 at 7:34 pm
Yes, Toronto is nothing like the west coast. A coworker just moved from here (Victoria) to Toronto and said that he’s deciding between buying an equivalent house in a slightly nicer neighbourhood and pocketing $200,000, or getting significantly more land with a barn and guest cottage and merely making enough profit to avoid having a mortgage. And keep in mind that the median SFH in Victoria is about $100,000 lower than Vancouver.
15 Weekend Reading - May 18, 2007 - Million Dollar Journey // May 18, 2007 at 5:44 am
[...] Canadian Capitalist shows you how to calculate your net worth! [...]
16 Canadian Capitalist // May 18, 2007 at 9:43 am
Phil: You point out an important reason for a paid-off home. The “yield” from the asset is not taxable and could be significant. If A owns a $250,000 home free and clear and would otherwise pay $1,200 per month to rent a town home (yes, I am ignoring homeowner expenses like property taxes, maintenance etc. but I am assuming that A owns a home but rents a town home) A is enjoying a tax-free yield of 5.7%.
GIV: There is a word for someone with a $1 m home in a tony Vancouver neighborhood and no other financial assets: “house rich”. Still, I’d include it in my net worth because as FJ points out, you can sell and rent, or you can move to less tony area.
FJ: There is a subtle distinction between assets like a home and auto and an investment portfolio. Your sole motive for holding an investment portfolio is to earn a return. Your motive for holding other assets are different. We personally track both our net worth and our investment portfolio.
17 FinancialJungle // May 18, 2007 at 12:25 pm
CC: Can you elaborate on the motives for owning a home instead of renting (and investing the capital)? Are you referring to intangible benefits?
Everyone is different, but my motive of owning a home is to earn a return. A clinche you often hear is that you will need a roof over your head, therefore you need to own a home. Another is the demand for housing is high because home prices are appreciating.
First of all, I can get a roof over my head by renting. Secondly, there is a disconnect between market value and the demand for housing. Rents determine the housing demand. Rents are similar to revenues behind a corporation. They’re the fundamental numbers. Market values aren’t necessary the intrinsic values depending on the amount of speculation.
Hmm.. what was my point again?
Well, I put my home on my “balance sheet” so I can evaluate all my assets’ profitabilities. If I can earn better risk-adjusted, growth-adjusted and tax-adjusted yield/return somewhere else, then I have no problem unloading the home.
For instance, Joe lives in a $300k home. If the market is fizzling to the point where he can sell the home and rent it back for only a 3.5% yield, then he should do it. 5-year bond is just over 5%, so selling is a good deal financially. Take the proceeds and invest in a diversified basket of dividend stocks and income trusts, and that’ll likely pay for your rents, at the same time you save on home expenses such as property tax, home insurance, etc. This is similar to what I did in real life. Cash flow wise it’s similar, but it’s growing at a faster pace (dividend increases) then market rent.
If you leave your home out of your net worth, then you’ll never realize an opportunity to unlock the equity in your home to effectively fuel your retirement income.
18 FinancialJungle // May 18, 2007 at 12:37 pm
Opps. A few more things to add.
* Only the first paragraph is directed to CC.
* When I said 5-year bond, I meant 5-year fixed mortgage.
* I’m not encouraging readers to sell their homes and buy stocks.
Think that’s it. Thanks for reading my rant.
19 Phil S // May 18, 2007 at 1:38 pm
Owning a home provides an implied tax-free yield which would be about the amount that you would otherwise be paying in rent. So, my point in my other posts is that you need to look at it on an after-tax basis. Because if you own a home and thus avoid paying rent, then that amount (minus condo fees and property taxes) is essentially like making that money on a tax-free basis.
So, whether it is better to sell your home and live off the interest from the value of your home basically depends upon a variety of factors, including your tax bracket and home prices and rental rates in the area where you live. If you are in a lower tax bracket or are self employed and can somehow deduct everything, and live in a low rent area then yes, it would most likely make sense to rent. But for working slobs like me in a higher tax bracket, the home basically acts like a tax shelter, since income derived from investments would push me into ever higher tax brackets and my after-tax yield would be quite small.
20 Canadian Capitalist // May 18, 2007 at 1:51 pm
FJ: The primary motive to own a home is to put a roof over our heads. The primary motive to own an auto is to move us around. Hence they are not investments in the strict sense.
Financial motives are secondary for most people in owning a home. They have other factors such as pride of ownership, lifestyle choice, the sheer hassle of selling and moving etc. Just the thought of moving makes me shudder. I’ll wager that there are not many people like you.
21 FinancialJungle.com // May 18, 2007 at 2:57 pm
CC: You’re right. There are other intangibles that come with homeownership like pride etc. (I totally set you up for a home run swing on that.) It comes down to personal choices as you implied. I’m a relative mobile person, so it’s not so much work for me, and I also see many Vancouver homeowners moving around every 3 years or so, but I can see the other side of the discussion.
Phil: I’m making general statements, and do look at returns on after-tax basis for myself. For the general population, OAS clawbacks isn’t an issue, while dividend yields are tax-free or near tax-free, and sometimes tax-positive. Yes, people should look at tax-brackets, and I never said you shouldn’t.
Going back to the orignal discussion. I did leave my previous home on my balance sheet, because the home was saving me rents. A dollar saved is a dollar earned, so it was no different from my other investments that were earning in other ways.
22 Phil S // May 18, 2007 at 4:45 pm
I don’t see how you can possibly get qualified dividends to be tax-free, near tax-free or tax-positive. Every dollar of dividend yield that you get is grossed up by 145% and added to your taxable income. Then after your tax is calculated, 18.9655% of only the grossed-up amount of the dividend (the 45% portion of the 145% gross-up) is applied to reduce your taxes paid.
So, if you receive $1000 of dividend income in one tax year, I don’t see how you can get that money tax free. You gross it up to $1450 of the dividend and add it to your taxable income. Then 18.9655% of the $450 (which is $85.34) is your tax credit. Unless your income is so low that you aren’t paying taxes anyways, then from what I can see, the $85 of tax credit is nowhere near enough to offset the additional tax associated with $1450 of grossed up dividend on your taxable income. In my tax bracket, that results in roughly $522 of additional taxes and $85 of tax credits. It’s hardly tax-free, to me that means that only 16% of the dividend income is tax free and the rest is taxable.
23 Phil S // May 18, 2007 at 4:48 pm
It seem as though you would have to be in the 6% tax bracket (so in other words, your income is so low that you’re probably not paying tax anyways) in order to avoid paying tax on that $1000 of dividend income in my example.
24 FinancialJungle.com // May 18, 2007 at 5:25 pm
The 18.9655% is only the federal dividend tax credits. What about the provincial? In BC - where I live - you get an additional 12%. In Ontario, it’s 6.7%.
25 Phil S // May 19, 2007 at 7:20 am
A 12% provincial dividend tax credit means an extra $54 on $1000 of dividends. That plus the $85 federal tax credit still doesn’t seem like it would offset an additional $1450 of taxable income in any tax bracket north of the poverty line.
26 FinancialJungle // May 19, 2007 at 12:13 pm
Phil, please look for section (d) of the following page for an example on how to calculate the dividend tax credits. The dividend tax rate is applied to the entired grossed-up amount (145%), not just the 45%. In Ontario, if you’re in the 24% bracket, you still get a tax refund. For BC, the bracket is 30%. For these folks, receiving dividends are even more tax efficient than rents.
http://www.taxtips.ca/divtaxcredits.htm#EnhancedDTC
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