In “Welcome to the Journey” we discussed True Wealth as our goal of a secure financial future and a path to your dreams. Your journey to True Wealth starts with this first in a series of articles on Net Worth. Think of Net Worth as an annual financial health checkup your lifelong scorecard that objectively measures financial progress. In the following posts, we find the best path forward once you know your starting point.
“Do not wait; the time will never be ‘just right.’ Start where you stand, and work with whatever tools you may have at your command, and better tools will be found as you go along.” -George Herbert
Net Worth is total assets (what we own) minus total liabilities (what we owe others) and defines our net economic position or financial wealth. An increase in net worth shows improving financial health, and a decline is deteriorating health.
Increases can be from an increase in earnings, additional savings, investment returns, lower expenditures, or debt reduction. Declines may be due to a loss, a decrease in asset values, or additional debt.
Why Measure Net Worth?
Net Worth is a snapshot in time of personal financial wealth. It also measures your financial capacity and indicates how well you will be able to handle life’s inevitable surprises when they occur.
Think of Net Worth as a financial health checkup used as a lifelong scorecard that objectively measures financial progress. It shows specifically where you stand, so you don’t have to rely on vague notions like “doing pretty good” or “could be doing better.”
Those vague notions are not helpful. You’re doing good or doing better compared to what? Doing better than someone on the verge of financial collapse?
There are surprisingly many people that appear to be doing well but are not. They have good paying jobs, a nice house, and new cars. Some, however, are really living paycheck to paycheck and are one paycheck away from a financial crises.
We hear stories of people who wake up one day to realize after thirty years of hard work they can’t retire when they turn 65. Or, someone loses everything, including their home, due to a sudden job loss or illness.
On the other hand, you may have read The Millionaire Next Door, by Stanley and Danko, about the seven traits that show up again and again among those who have accumulated wealth but don’t show it.
Calculating Net Worth
The only way to know is measure as we go. Net Worth is easy to calculate. You don’t need an MBA or degree in finance; you just need to know how to add and subtract. Here’s the formula:
Total Assets – Total Liabilities = Net Worth
Start with a pencil, a sheet of paper, and a calculator. Or if you wish, there are plenty of spreadsheets and websites to assist you.
I prefer the simple sheet of paper to pull out and see the progress over the years. It’s exhilarating to see how far you’ve come.
Calculating Your Net Worth
To calculate Net Worth, we use a Net Worth Statement where you write down everything you own on the left side (or top) of a sheet of paper. These are your assets. Place your best estimate (guess) of the current value next to the asset on the sheet.
On the right side (or bottom) of the sheet, list all you owe and place your best estimate of the balance next to each item on the list. These are your liabilities.
You don’t have to be precise. We just need a reasonable estimate for our purpose. Subtract the liabilities from the assets, and that’s your Net Worth. This **Net Worth Statement** is used in the next post “Prepare Your Net Worth Statement” with instructions to follow.
A recent college graduate’s Net Worth Statement might look like this:
College Graduate Net Worth Statement
|Checking Account||$1,237||Loan from Parents||$6,500|
|Laptop Computer||$900||Visa Credit Card||$1,243|
|Total Assets||$13,137||Total Liabilities||$55,743|
Total Assets – Total Liabilities = Net Worth
$13,137 – $55,743 = -$42,606
Oops, a negative Net Worth isn’t good. But if yours is negative, don’t worry. Many start out that way, and your Net Worth isn’t your Self Worth.
If you have a positive Net Worth, that may or may not be good depending on where you are in life and where you want to go. More on that in the future posts.
This also brings up a shortcoming of the Net Worth Statement. It fails to place any value on the experiences you ’ve gained or the investments you made in education or training. These have an intrinsic value that is hard to account for because the value in dollars has yet to be fully revealed.
Although an important value ignored on your current Net Worth Statement it will be revealed there in time. Until then list education, training, experience as qualitative factors under assets. and rest assured the value will eventually get translated into measurable Net Worth.
Getting to A Better Place
I’m going to guess when you finish the next post you’re not going to be where you want to be. Perhaps though you feel secure “enough” where you. You may fear being overwhelmed by trying to get to a better place.
Don’t feel that way. We’ll take this a step at a time so you will always have one foot in a place you know and are comfortable and the other stepping forward into what you are exploring. You’ll see how easy it is to calculate your Net Worth and learn where you are better than anyone.
As Dr. Jordan B. Peterson says in his excellent book 12 Rules for Life, An Antidote to Chaos:
“You positioned yourself where…you are under control and you are secure, but where you are also alert and engaged. That is where there is something new to master and some way that you can be improved. That is where meaning is to be found.”
In the next post “How to Determine Your Net Worth” you will find where you stand financially.