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Know
How To Calculate Your Net Worth
You've
got to know how to calculate your net worth if you want to make your
financial plans count.
Counting your
money means coming up with a balance sheet or
net worth statement. By tracking your assets and
liabilities you can identify where you are on the road
toward your personal financial goals and pinpoint obstacles
that might be getting in your way. Each financial
transaction you are a part of should have a defined
purpose. Your spending should have a plan.
To figure net worth
tally your assets and your liabilities and subtract
the latter from the former. While it's easier with a simple
spreadsheet program, you can certainly do it by hand.
But oddly, most folks never
get around to figuring their net worth.
“You could call most people
in the middle of the night, ask them their checking account
balance, and get an answer within $100 or so of the actual
amount,” says Kathy Sullivan, vice president of personal
financial planning at Northern Trust. “But some of these
same individuals do not know their net worth, which is a much
more important number.”
Here’s how to go about
finding that important number.
Tally Your Assets
Your assets are the things
you own, from your blue chip stocks to the change in your
pockets. So go through your files—and empty out your
wallet—and calculate your worldly goods.
"One area to pay
attention to is your collections: antiques, artwork, jewelry
and so forth,” Sullivan says. “If you have never had your
collections appraised, completing your net worth statement
should prompt you to do so. And, if you have never had them
insured, this process is a good reminder to get that done, as
well.”
This is also a good time to
consider your heirs and put your financial house in order. As
you’re going through your files, update your list of what
you own and where it is. That will keep the executor of your
estate from racking up billable hours chasing down rumors of a
second safety deposit box.
What not to include:
Social Security and pensions that will be paid as annuities or income streams. And don’t include your assets of
future value—things like pension plan or Social Security
death benefits, life insurance policies or Veteran
Administration benefits. For this project, look at current
assets—your accumulated wealth—only.
Now pause for a moment to
savor that big number before you go on to…
Total Your Liabilities
Your liabilities are the
things you owe, from the mortgage on your vacation home to the
balance on your platinum card to the $20 you promised Larry in
accounting you’d throw into the pot for the VP’s
retirement gift.
This process forces you to
sit down and consider your total liability instead of just
your next month’s credit card bill.
Find the Bottom Line
Now for the big moment: Subtract
your liabilities from your assets. That’s your
personal bottom line. Now, while you’re still at your desk,
perform a quick analysis:
- Check your diversification
to make sure you’re not sitting on too much cash.
- Weigh your comfort level
with your liabilities. Ensure that your debt hasn’t
crept up too much.
- See how much your net
worth has grown or shrunk in the past 12 months.
Now file your net worth
statement away until it’s time to check it again.
Many people like to use
their year-end account statements to figure their net worth
annually. If you have accomplished some
of your major financial objectives—perhaps accumulating your
first million and eliminating your credit card debt—every
two years is probably often enough for an update. You may want
to check your progress more often, though, if you are working
on a specific goal, like paying off the mortgage.
And if you find yourself
updating your net worth every day before lunch, back off.
Perform a checkup too often, and your statement becomes
deceptive. Because at that point,
your net worth is just swinging with the financial markets.
However often you choose to
figure your net worth, your personal balance sheet can help
you make sure you’re on track to meet your financial
goals—or figure out what’s causing you to get stuck.
If you are going to manage
your wealth you need to measure it.
Mvelopes Personal
 is an online budgeting system that makes it easy to create an effective
budget and track every aspect of your spending as it happens. It will help you always know exactly how much you have left to spend, instantly know the impact of every spending decision, effectively manage credit card spending, and quickly create an easy to use household budgeting plan.
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