Net Worth Statements: Over 50% of People Get This Wrong

Last week we filmed a video on net worth statements. What are they? Why you should do one? And some unique insights that only a social loser like me who sits in night after night looking at strangers’ statements would even know. Well, the first of those insights drew such a strong response from people we test the videos on that I thought we’d reshoot the video focusing just on that point.

We’ll get to the other stuff later. Try to contain your excitement.

Alright, quickly, what is a net worth statement? In essence, it’s an individual’s or family’s equivalent of a corporate balance sheet. A list of all your assets on one side and all your liabilities on the other. The former minus the latter, is your net worth.

Well, your net worth financially. Your true worth, thankfully, is determined by a lot more than just money.

Now, here’s the point that got people thinking, talking, and in one case, worrying: it’s a classic mistake that I see from people putting together their net worth statements.

Over and over again, seriously, well over half the net worth statements I see get this wrong. People list their RRSP value on the asset side of the ledger. Makes perfect sense, but they neglect to put the estimated tax eventually owed on the liability side. You must do both. If you don’t, you get an inflated view of your net worth.

You really do. Then having a $250,000 RRSP listed on the asset side would be the equivalent of having a $250,000 TFSA. Clearly it’s not! With the RRSP, you have a co-owner, a partner, an unwanted partner in the government, but a partner nonetheless. The TFSA, on the other hand, is all yours. You know where I see this and it really bothers me?

Divorce settlements where the two parties are negotiating the deal without outside help. One spouse says, “Oh, why don’t I just take the house, it’s worth a million, and you take the RRSP, it’s worth a million, we’re fine.” Bad deal for the second spouse because of the tax liability. No partner on the house. Mo, how many times have we seen that?

Three or four I bet! At least. It’s crazy. In fact, I just saw one recently. Anyway, interesting stuff, at least to me.