HOW TO CALCULATE NET WORTH-WHAT ARE YOU WORTH?

By in Money Management, Personal Finance, Wealth | 17 comments

Get Rich Step by Step-What is Your Net Worth?

“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver,”  Ayn Rand

The first step in creating a fitness and diet plan is to step on the scale. Nobody likes to get weighed, but you have to accept where you are right now, before proceeding to change. It’s how you keep track!  This article instructs in how to identify your financial baseline. Simply put, net worth is the total of your financial worth on a particular day. Net worth includes everything your own that could be converted into cash minus all the money you owe. Just like your weight, your net worth goes up and down. But, don’t worry about it; just get a ball park number. Remember, you don’t need to be perfect.

Why Calculate Your Net Worth?

Why do you need to figure out your net worth? Why should you care about the value of what you own? If you want control over your financial life – the opportunity to save for travel, college for your kids, a new laptop, and retirement – you must be aware of your financial footprint right now. Would you begin a trip, pull out the map, and start driving if you didn’t know where you were? Knowing your net worth is the same principle. Face up to your financial situation, and use it as a starting point to see if you are on track and able to meet your future goals. As you develop sensible money habits, your net worth will go up and you can use it to measure your financial progress. It is the yardstick to measure your money buildup.

An added bonus of knowing your net worth; after figuring out the value of all the stuff you own, most of which you never use, you may decide to sell some of it to get more cash! Then, you can use that cash for experiences or things that you really value!

It’s easy to figure out your net worth; as a matter of fact, you can even use a money management computer program like Quicken by Intuit or mint.com to computerize this basic money task. Although it takes some work at the outset to set up a money management computer program, in the long run it is a real time saver and gives you valuable insight into your financial picture, at a glance.

Step 1; Your Assets

Gather all of your financial statements: bank account(s), investment account(s), retirement account, old savings bonds stuffed in a drawer. These are called Financial Assets. They are cash or can be converted into cash. Ballpark the value of your home, vehicles, and possessions.

Print out the article and complete the charts.

LIST ALL OF YOUR ASSETS

LIST ALL OF YOUR ASSETS & TOTAL

Congratulations, Step 1 is done!

Step 2; Your Liabilities

Wouldn’t it be great if your total Assets equaled your Net Worth? Unfortunately, for most people, they don’t. To continue with your financial weight, or Net Worth, you need to subtract what you owe from what you own. Follow the steps, and before you know it, you will have your current financial picture and an important part of your money education will be complete! Gather all of your debt statements; that includes mortgage, credit card, student loan, personal loan, and any statement showing now much you owe. This step is painful, so do it quick to get it over with. Next, fill in the Liabilities chart.

Print out the article and complete the charts.

net worth_liabilities

LIST WHAT YOU OWE & TOTAL

Congratulations, you’ve done the heavy lifting. Get ready for the big finish. No matter how you net worth chart comes out, you know the truth and are beginning the tough path to money strength.

Step 3;  Your Net Worth

Next, subtract your liabilities from your assets. The result is your net worth.

net worth total

 

Whew, you did it! Give yourself a pat on the back for calculating your net worth. Now what? You have your financial net worth as of today, but what do you do with it?

Are you on track to meet your future financial goals? This chart is your method to track your financial direction. Use the net worth figure to measure your financial progress. Ultimately, to keep your net worth growing you want to increase your assets like savings and retirement accounts, and reduce your debts. You can also grow your net worth by paying off your mortgage. If your home appreciates (goes up) in value over time that will also boost your net worth. The beauty of a growing net worth is that the assets you amass, free you from financial stress and can be traded for time to pursue other activities. The greater your net worth, the more financial resources you have to fund retirement, pay for your child’s education, go on a vacation, work part-time or any other monetary wishes.

Check out your net worth every year or so and see if you are on financial track to meet your money goals.

Help-My Net Worth is Negative

What if your net worth is negative? Remember, it is just a starting point. Just like your weight or your fitness level, your net worth can change. But you must make it happen! You must get rid of debt to build net worth. Ben Stein and Phil DeMuth in Yes, You Can Get a Financial Life! chastise the over spenders. Their no nonsense approach to money is right on target; you are only entitled to purchase what you can afford. They clobber the belief that you “need” the status items beyond your budget like the designer hand bag the stars’ carry and the exclusive resort vacation that you put on your credit card. You pay for those unnecessary extravagances with your future! Additionally, to keep your net worth growing, separate your needs from your wants. Fund your needs and prioritize your wants, based upon your extra cash. If you have debt, put the wants on hold.

Action Steps

  1. Commit to eliminating one debt.
  2. Choose the debt.
  3. Write down how much above the minimum you will pay each month to eradicate the debt.
  4. For a really simple way to calculate your net worth, check out this Net Worth Calculator at Financial Mentor.

Do you track your net worth? If not, what’s stopping you?

    17 Comments

  1. I usually calculate my net worth excluding personal residence and personal property because I have to live somewhere and a home is an illiquid asset. Also, personal property is worth very little anyway. Since I do owe money on my mortgage I include just the amount of equity to offset the liability. I want to know the value of my investments and this seems better for me.

    krantcents

    February 19, 2013

  2. I began calculating my net worth monthly 5 years ago…It’s been an amazing ride watching my success; over $160K in that time!

    The Happy Homeowner

    February 19, 2013

  3. @Krantc-I understand both approaches. I like to see the bigger number, even though I know I have to live somewhere. I figure, I could sell the condo and rent if necessary.
    @Happy-Congrats!!!

    Barb

    February 19, 2013

  4. The slight complication that you have not I think included is where people have a pension plan that is linked to their salary.

    This is fairly common in Europe. In that case to calculate the net worth, you need to look at the annuity rates and what size pot you would have to have to generate the pension that you will get.

    This can be quite an eye-opener, particularly as annuity rates have decreased a lot since 2008.

    John@MoneyPrinciple

    February 19, 2013

  5. I calculate our net worth every month and it definitely provides a lot of insight. It’s interesting to see the differences in how people calculate it but I think it’s really based on how you define net worth. I look at it asking if we would have if we liquidiated all assets and paid all liabilities, what would we have left? Therefore, I do calculate our home and car values.

    Money Beagle

    February 20, 2013

  6. @Money-I’m surprised at how frequently you and some others calculate their net worth. I use Quicken and it’s staring me in the face every time I open the program. If I did it by hand, I’d probably only check 2 times per year. It’s great when markets are rising, but when they are falling it’s tougher to watch.

    Barb

    February 20, 2013

  7. I’m with Krantcents, I can always add the house back in, but the ‘Number’ we target is the assets that are going to provide income during retirement.

    I also ignore things like the value of the cars, instead, I use a ‘sinking fund’ strategy in which we account for the need for the next car purchase.

    JoeTaxpayer

    February 20, 2013

  8. After reading the post and the comments I’m a little 50/50. Barbara, I think your post is a great starting point for someone who has no idea what they might be worth and or how much their debt is actually impacting their life. For everyone in the comments I can see where you are coming from – net worth is not only a personal measure but also a tool to help plan for the life and lifestyles we want for ourselves. I think you have to create and measure metrics that make sense for you and then try to grow from there.

    Nunzio Bruno

    February 21, 2013

  9. @Joe and Nunzio, Very wise. Figuring out what works for you. Personally, I like to look at the “number”, even though I understand it’s highly unlikely I will ever liquidate all of your assets.

    Barb

    February 21, 2013

  10. I very rarely look at my net worth in aggregate. I find its too much of a distraction. Your mood can be negatively influenced by Mr Markets mood on any given day, and this can cause you to make rash investment decisions. Like you, I probably do a systematic calculation of net worth a couple of times a year. Monthly is just too much of a distraction for me.

    Integrator

    February 21, 2013

  11. Doing this can really help someone. Not just knowing their worth but also how to manage their finances well.

    KC @ genxfinance

    February 22, 2013

  12. @Integrator, I completely understand. In the short term market movements are random and those with investments can tie their mood to random market movements with little impact on long term wealth. Less is more in my opinion.
    @KC,Agreed, another money management skill for building wealth.

    Barb

    February 22, 2013

  13. We track ours mainly from the viewpoint of understanding where we stand in relation to current estate tax laws. We also keep in mind that even when the numbers look good, they actually are elevated. We won’t get the full market value of our home, due to sales commissions and taxes. We won’t get the full value of our investment portfolio due to the same! The value we place on our ‘stuff’ – personal property, may be different that what we could actually sell it for and etc.

    Marie at Family Money Values

    February 22, 2013

  14. Good Post. I never thought my net worth because I have been so busy trying to pay off my debt. After doing this exercise I am in the positive but still have a long way to go.

    Kevin Watts

    February 22, 2013

  15. My husband and I keep track of our net worth on an ongoing basis using Quicken. That way we always have a snapshot of where we are at as compared to where we want to go. It keeps us motivated and oddly enough it creates an accountability that wasn’t there before we started doing this.

    Pam

    February 23, 2013

  16. @Marie-Very important reality checks! Clearly, the net worth figure is a “ballpark”, for all the factors you mentioned. For those nearing retirement, it is extremely important to keep on top of the estate tax laws. Who wants to give more than is necessary to Uncle Sam?
    @Kevin, Paying off debt is crucial. If you’re in the positive, you’re going in the right direction!

    Barb

    February 23, 2013

  17. I used to track my net worth pretty closely, but got away from it for a while. Now that I am trying to pay off debt, I want to track it so I can follow my progress monthly. I will be creating a financial statement on the first of each month so I know exactly what is happening.

    JT

    February 26, 2013

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