Your financial starting point: net worth statement and monthly cash flow

What you will learn

• How to build a net worth statement from your assets and liabilities.
• How to record your monthly cash flow from bank statements, not from memory.
• How to calculate your savings rate and your liquid net worth.
• How to read both numbers together to decide what to work on first.

Explanation

Every financial plan starts with two pictures. The first is a snapshot: what you own and what you owe on one day. The second is a flow: how money comes in and goes out each month. You need both, because a good snapshot can hide a bad flow, and a good flow can hide old debt.

The net worth statement

An asset is something you own that has a money value: cash, bank balances, investments, a car or a home. A liability is money you owe: a car loan, a credit card balance, an overdraft (Dispo), a student loan or a mortgage. Your net worth is:

Net worth = total assets − total liabilities

Rules for an honest statement:

• Use today's market value, not the purchase price. A car bought for €15,000 three years ago is worth what a buyer would pay today.
• Use the remaining balance of each loan, as shown in your loan statement, not the original amount.
• Leave out personal items with no realistic resale value (furniture, clothes). They are not money you can use.
• Group assets by how fast you can turn them into cash without a large loss. This is called liquidity.

Liquid net worth counts only cash, bank balances and easily sold investments, minus all short-term debts (credit cards, overdraft). It tells you how much you could actually use in an emergency. A person can have a positive net worth because of a car but a negative liquid net worth.

The monthly cash flow

Cash flow is the difference between your net income (the money paid into your account after tax and social contributions) and your outgoings in the same month. A positive result is a surplus; a negative result is a deficit.

Build it from your last three months of bank and card statements. Memory always underestimates small, frequent spending. Sort every payment into a few categories: housing, food, transport, insurance, communication, subscriptions, leisure, clothing and other. Payments that happen once or twice a year (car insurance, a broadband contract fee, gifts) should be divided by 12 and added as a monthly amount. Lesson 8 shows how to plan these properly.

Your savings rate is:

Savings rate = monthly surplus ÷ monthly net income × 100

The savings rate is more useful than the euro amount, because it stays comparable when your income changes.

Reading the two pictures together

• Positive net worth, positive cash flow: stable base; you can plan goals.
• Negative net worth, positive cash flow: you are repairing the past; debt repayment is usually the priority.
• Any net worth, negative cash flow: urgent; your position gets worse every month until the flow is fixed.

Repeat the net worth statement every six or twelve months on the same date. The trend matters more than any single number.

Worked example

Hypothetical example: Lena, 29, employee in Germany. All figures are invented, rounded and checked on one date. Taxes on investments and selling costs are excluded.

Step 1: Net worth = €25,000 − €12,000 = €13,000.

Step 2: Liquid net worth = (€2,400 + €5,000 + €8,600) − €900 = €16,000 − €900 = €15,100. The car and the long-term loans are left out of this figure.

Step 3: Monthly cash flow. Net income €2,650. Outgoings from three months of statements (averaged): warm rent €950, food €380, car loan instalment €220, fuel and car insurance €160, phone and internet €55, other insurance €45, subscriptions €40, leisure €300, clothing €80, other €120. Total outgoings = €2,350.

Step 4: Surplus = €2,650 − €2,350 = €300. Savings rate = €300 ÷ €2,650 × 100 ≈ 11.3%.

Interpretation: Lena's position is stable. Her next questions are whether the credit card balance should be cleared from savings (Lesson 4) and whether €5,000 is enough as an emergency fund (Lesson 3).

Common mistake

Practice activity

Hypothetical case: Jonas has €1,200 on his current account, €3,000 in instant-access savings, shares worth €2,500 and a motorbike worth €4,000. He owes €2,800 on a consumer loan and has a €600 overdraft. His net income is €2,100 and his outgoings are €1,995 per month. Calculate (a) net worth, (b) liquid net worth, (c) surplus and savings rate.

Key takeaways

• Net worth = assets − liabilities, using today's market values and remaining balances.
• Liquid net worth shows what you could actually use quickly.
• Build cash flow from real statements and include yearly costs as monthly amounts.
• The savings rate and the trend over time matter more than one snapshot.

Next step

In the next lesson you will turn your cash flow into a budget using the 50/30/20, zero-based and envelope methods.