Most people immediately see the negative consequences of the loss of income, but the situation also can present your family with a valuable opportunity. Your family can use this circumstance to make some positive changes. It can be a new beginning to take control of your financial resources and review how your family is using its income.
A starting point is to make an inventory of current assets and liabilities that lists:
- all real and personal properties or assets you own
- all credit and loan obligations you owe
This inventory is called a “ net worth statement ,” or is sometimes referred to as a balance sheet. A net worth statement is a basic management tool you can use to make a variety of financial decisions and measure your financial progress.
A major concern for a family with reduced income is how to pay incoming bills, meet other financial contracts, and still have enough money for food and other necessities. Reviewing the family’s financial resources will help you decide what changes need to be made to balance spending on a reduced income. For instance, checking all current liabilities (credit card payments, mortgage and home equity loans, automobile loans) will help determine what adjustments may be needed to meet credit payments. Is there a liquid asset such as a money market fund, short-term certificate, or insurance cash value that can be converted to cash easily and inexpensively? Could you renegotiate a loan?
Lending institutions and companies usually require a net worth statement before issuing or negotiating a loan.
If your family has never completed a net worth statement , it will take time to gather the documents needed to complete the financial statement and to determine a current market value on each item. Don’t get discouraged. Make it a family project: that way, all family members can be involved and increase their understanding of the family’s financial situation. This will help them understand spending priorities and the financial costs of daily living.
Placing a value on assets is perhaps the most difficult part of completing a net worth statement. An asset’s market value is used to determine its economic worth. Market or current market value is the price a willing buyer would pay a willing seller for an asset. It is relatively easy to get a market value for bank accounts, certificates of deposit, stocks, and similar assets. If you do not know the current value for these types of assets, check with your banker, stockbroker, or the financial officer where your savings or investments are located.
Household furnishings, furniture, appliances, clothing, and similar personal items are more difficult to assess. There is less precision. The value has depreciated and its current market value is lower. To determine the market value of most personal property, you need to know its average life expectancy. A depreciation guide can help you with this process.
For instance, the guide tells you that the life expectancy of most appliances is about 15 years. If a refrigerator cost $550 seven years ago, the market value now is about $293. The refrigerator depreciates in value about $36.66 each year ($550 divided by 15 equals $36.66). It is seven years old, so it has depreciated $256.62 ($36.66 multiplied by 7). The purchase price of $550 minus $256.62 (depreciation) equals $293.38. Rounding this number to $293.00 gives us the refrigerator’s current market value.
Other resources that can help you place a market value on assets include standard library references such as the National Automobile Dealers Association (N.A.D.A.) Official Used-Car Guide and the Kelly Blue Book of used car values. Kovel’s Antiques and Collectibles Price List or Warman’s Antiques, available from bookstores and many libraries, can help you assess the worth of antiques. Registered appraisers and real estate brokers also can help determine the value of a house or small business, or of assets like antiques. These professionals are especially useful if you have never had such assets appraised and cannot find the information you need.
Clothing older than three or four years has little market value. While it is costly to replace an entire wardrobe, as may be necessary with a fire, flood, or similar disaster, the actual market value if you were to sell your clothing would be much smaller. Because the market value for clothing is relatively low, making a complete inventory of your family’s clothing may not be worth the time. You can use the depreciation chart to come up with a rough estimate of the market value of your family’s clothing.
To determine your family’s net worth, total all assets and all liabilities. Then subtract total liabilities from total assets. The result is your family’s net worth at this time. Ideally, your assets will be greater than your liabilities.
Completing your first net worth statement will take time. It may be necessary for now to estimate dollar values for household furnishings, jewelry and other personal belongings. Then, as time permits, you can be more precise with market values of these items.
Loan offices use this information to evaluate maximum borrowing capacity, or your ability to repay a loan. A net worth statement also will be helpful in estimating insurance needs, measuring progress toward financial goals, determining diversification of assets, and planning an estate.
A net worth statement is a basic financial management tool. During this time of reduced income, it will be a valuable document for planning and directing financial resources. If the balance sheet is kept current, it will provide a realistic picture of your family’s financial situation.
Update your net worth statement at about the same time each year to determine if your family is moving ahead. The only way to increase net worth is to spend less than income earned. This means some income must be saved and invested each year.
The Penn State Extension office in your county offers educational programs to help your family adjust to a loss of income, to learn ways of coping, and to improve skills to stretch limited dollars.
Furry, M. M. (1994) Listing financial resources and determining net worth: Taking control of your money #2. University Park, Pennsylvania. Penn State Extension.
Holm, J. L. (1999) Take stock of family resources: When your income drops #2. Raleigh, North Carolina. North Carolina Cooperative Extension Service.
Quinn, J. B. (1997) Making the most of your money. New York, New York. Simon & Schuster.
Prepared by Marilyn Mancini Furry, former associate professor of agricultural and extension education.