Adding It All Up: Determining Your Net Worth
Figuring your net worth can help alert you to financial problems.
Given recent economic history, it's not surprising that people are paying close attention to their net worth. The dip and rebound in the stock market, the uncertainty over home prices and the gathering financial recovery has many people asking what's happened to their net worth over the past few years. While changes to your net worth can stem from many causes, calculating this important number is straightforward. Investment adviser Robert LeFevre Jr., -- a certified public accountant and certified financial planner -- takes the mystery out of this sometimes elusive term.
What Exactly Is Net Worth?
Here is LeFevre's definition: "Net worth is what's yours, really yours. First, add up the value of everything you own, then subtract the total amount of any debts that you have. What's left is your net worth." Financial planners point out that the actual value of your net worth is less important than its growth over time. You can learn a lot about your spending and saving habits by regularly tracking the items that make up your net worth. You can use financial software or a pencil and paper, but tallying up your net worth every three to six months can help keep you on track and alert to potential problems.
Assessing Your Assets
Start with what you own -- your assets. The biggest ones might be your home and your car. You will want to write down your best estimates of what these items would sell for today rather than their original purchase prices. Add in other big-ticket items you own -- a motorboat, shop machinery, musical instruments, jewelry, art and any other objects worth $500 or more. Next, add in your financial assets, such as cash, bank accounts, certificates of deposit, brokerage accounts, individual retirement accounts and any other investments. The tally represents your total assets.
Don't be too upset if you find that your home's value has remained stable or turned down in recent years. Remember, this has happened all over the country, at every economic level. Continuing to keep your house tidy and in good repair will help you realize the best possible price should you decide to sell your home in the future.
Listing Your Liabilities
Liabilities are what you owe. Start with your biggest debts first. Your mortgage balance and remaining student loans might top the list. You also may be paying off one or more vehicles. Next, add in your current balances for credit cards, revolving home improvement loans and other types of consumer debt. Finish up with any medical bills, liens, court judgments or back taxes that you currently owe. Figure the sum of all your liabilities, and then subtract it from your assets, giving you your net worth.
What the Number Means
When it comes to net worth, it's not the number, but rather what you do with it that matters most. If you have a negative net worth, you've already taken a great first step by identifying the problem. By inspecting your debts, you can develop ideas to modify your spending habits. Your list of assets will help show you if you need to increase your savings and investments. Most of all, be realistic with your numbers -- an accurate number is a lot more valuable than a "feel good" one.
Examine the trend of your net worth over time. If it's not growing as fast as you would like, consider putting together a budget that will help get you moving in the right direction. The payoff will come when you find you have enough net worth to do the things that are important to you, such as traveling or engaging in hobbies that were once too expensive to afford.