How can you know where you stand financially? In “Net Worth as a Lifelong Scorecard,” we discussed the Net Worth Statement as a tool to measure financial health annually and progress building wealth. Today, in this second article in a series on Net Worth, we’ll go through some easy instructions to determine your Net Worth.
Net Worth defines our net economic position if we convert everything to cash and pay off all debts:
Net Worth = Total Assets (what we own) – Total Liabilities (what we owe others)
Preparing Your Net Worth Statement
To get started with your Net Worth, you can print this “Net Worth Worksheet“ and fill it out following this guidance. On a side note, there are some cool Apps we’ll cover in other posts to automate this simple process if you wish. First, let’s get a good understanding of what those Apps will be telling us.
Your Net Worth Statement doesn’t have to be exact; we just need an approximation of our financial wealth starting point. So, use reasonable estimates or best guesses, rounded off to the nearest $100 or so, in preparing the statement. We’ll go over some suggestions for how to estimate in this post.
Many items on the statement will be either in the asset or liability section. However, some items will be in both, like your house, vehicles, or anything for which you borrowed money and are making payments. List the current values in the asset column and the amount owed in the liability column. The difference between the two is what you own and will be part of your Net Worth.
Assets (what you own)
Use today’s cash value for all assets, not what you may have paid for them.
Checking and savings accounts are easy, just use statement balances. The price quotes for stocks, bonds, and mutual funds are in the newspapers, found online, or on the most recent brokerage statements.
Value your household inventory (furniture, appliances, computers, clothing, personal items, etc) by estimating what you could sell them for at a garage sale or online. Do not use replacement value, what a replacement item would cost today because once used, the value can drop significantly.
A household inventory may be helpful in estimating the value; just be sure to estimate conservatively.
Certain personal property, such as jewelry or antiques, can be more challenging. Don’t let unknown values stop you. A “best guess” for now is fine, enter it until you determine a more accurate value.
A valuable lesson in this exercise is learning what declines in value (and how fast), as well as what increases in value. Prepare yourself for some shockingly low numbers, because many assets decline in value, some rapidly.
Knowing the difference between declining and appreciating assets will help form a bias for appreciating assets that can work wonders on net worth over time.
Find vehicle values in the Kelley Blue Book available online, at the library, or from an automobile dealer.
Your largest asset is often Real Estate and you or your neighbors probably know what your houses sell for today. Use online resources like Zillow or Redfin to provide estimates sufficient for determining Net Worth.
Add assets not listed on the sheet, a boat for example, in the “Other (specify)” section. Conversely, if you don’t own an asset listed, just leave that section blank.
Liabilities (what you owe)
Borrowed money for the purchase is a liability. Find the balance owed on the most recent statements.
The house mortgage balance is on the mortgage amortization table from the loan company or available by calling the lender for the balance.
For credit cards, include only the ones that you do not pay off each month. Similarly, household expenses, like utility bills and other routine expenses paid each month, are not liabilities and do not belong on the net worth statement.
Credit card balances carried from month to month count as a liability. They are unpaid bills, also called accounts payable.
If you pay Real Estate taxes annually, enter the total amount of taxes which are currently due but are unpaid as a liability. Do not list Real Estate taxes paid monthly into an escrow account. Tax escrow payments is an ongoing expense.
Enter the total value of any liability not listed in the “Other (specify)” section. Conversely, if you don’t have a liability listed, leave that blank.
Calculate Net Worth
Calculate Net Worth by subtracting total liabilities from total assets. Be sure to date the statement and save it. We will update the Net Worth statement once a year and compare it to the previous ones to measure our progress.
Congratulations! Calculating Net Worth is an important step on the journey to True Wealth. We went from an unknown financial position to one we know. Now we have something to work with and use to guide us to a better place.
Keep your net worth statement nearby. We’ll refer to it in the next post and update it annually as we measure progress. Someday you will look back with amazement at what you accomplish over the long haul with persistent effort.
What Should my Net Worth be?
We’ll start to answer this question in the next post: Setting a Net Worth Goal. In later posts, we’ll compare how our monetary wealth compares with your peers and others and then start laying out how we get to where we want to be: True Wealth.
Now that we know our starting point, the next post Set a Net Worth Goal will guide us through an example of how to set a preliminary financial wealth goal.