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What is Net Worth and How to Use It

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Net worth is what money you have left after you subtract your liabilities from your assets.  Assets are any item that you could sell and get cash for.  This includes everything from stocks and bonds, to cars and even furniture.  Liabilities are when you owe money to someone else.  This includes mortgages, car loans, personal loans, credit cards, student loans.

Your goal should be to have a positive net worth.  A negative net worth means that if you had to pay off all your debts today you would not have enough money to accomplish this.

Why You Should Care About Your Net Worth

Your net worth is one of the best ways to get an overview of how your finances are progressing and to get a glimpse of where problems might creep up.  By watching the rising and falling of your assets and debts you will understand what areas you may need to pay more attention to.  Consider it your mid-semester report card, a chance to see where you are doing well and where you need to study harder.  Allowing you to stop any problems that can cause you to fail.

I also look at it as a mile marker for my trip to retirement.  I know where I need to be for retirement, so looking at my net worth tells me how far along I am on my trip to retirement.

How to Use Net Worth in Daily Life

In order to pick up on trends from your Net Worth you need to be looking at it on a regular basis and know what to look for!

  1. Set up a regular time to review your net worth.  Choose either monthly or quarterly and then add it to your calendar.  It is important to do this because our cash flow tends to ebb and flow depending on when we get paid and when bills are paid.  By compiling our net worth at a regular time then you don’t have to worry about these flows.  Personally I get a quick view of it when I open Quicken weekly, then do a full printed version to review every six months. (The print out is also from Quicken as they have a set up report that you can pull up automatically).
  2. While it is important to look at the overall number, the real value in looking at your net worth is in looking at the variances every month.  Review each area to ensure that your debt is going down, your investments are going up and your cash is where you want it to be.
  3. If you notice that one of these areas is headed the wrong direction you will want to dig deeper to figure out why.  Are investments down because the market is down or are you paying too many fees?  Is debt up because you have been spending too much?  Time to dig into your monthly expenses to see what is causing the increased spending.
  4. Make adjustments where you begin to see problems.  Just like your report card helps you catch a bad grade from becoming permanent your net worth report allows you to catch the spending leaks early and can change investment professionals if the investments are sinking and the market is not!

How to Figure Out Your Net Worth

Of course in order to do all the above things you need to know how to figure out your net worth.  In order to calculate your net worth you will want to list your assets and then total them.  Then list your liabilities and total them.  Then subtract your liabilities from your assets.

To begin with do these with paper and pencil, after the first time you can begin to do this in your preferred way to keep track of your money.  Examples include: paper & pencil, Excel, Mint.com or Quicken.

  1. List all Assets – When you are compiling your list of assets you want to think of everything that you could sell to get your hands on cash if you needed to.  At the same time you don’t necessarily need to be detailed down to your last pair of socks.  Be realistic in what you would get rid of to pay off debts. Personally I only look at investments, housing, and cash assets.  The only time you should include your business in this is if you know that you can sell your business. Then your value estimate should be what you could get for it if you sold it today.

Here are some examples to help you figure out your assets.

  1. Stocks
  2. Bonds
  3. 401K
  4. Roth IRA
  5. Market value of home
  6. Market value of cars
  7. Anything in your home you could sell for cash – furniture, gold, jewelry, etc

Be careful not to overestimate the value of items such as cars, homes, furniture, etc.  It is better to error on the low side.

Now add all the assets together to get your total assets.

  1. List all Liabilities – these are all of your debts; people or companies that you owe money to.  These are not your monthly bills such as utilities, but instead items that once paid in full will go away.

Here are some examples:

  1. Mortgage
  2. Car payment
  3. Credit Cards
  4. Student Loans
  5. Old medical bills
  6. Line of credit
  7. Loan from mom

Finally add your liabilities together to get your total liabilities.

  1. Now subtract your liabilities from your assets.  This number is your net worth!

Net Worth Example:

Assets:

House:   $150,000

Car: $5,000

Investments: $30,000

Total:  $ 185,000

 

Liabilities:

Mortgage: $130,000

Car $1,000

Student Loans: $25,000

Total: $156,000

Net Worth: $185,000 – $156,000 = $29,000

 

Congratulations, you have calculated your net worth!  Now you have one more tool at your disposal to help you reach your goals.

3 comments
Ivonne says June 27, 2012

I started to use the net worth calculation last year when a tax demand sent me into a “OMG I’m gonna lose everything and land on the street”-frenzy. The end result was so much higher than I had ever imagined and helped me calm down and get realistic again. Now I calculate it every three months and also encourage my clients to work with this tool. It’s kind of a personal guiding light that helps you find out where your are and where you are heading.

    Andrea says June 29, 2012

    @Ivonne – it is such a great guiding light. Sometime it is hard to see the big picture and Net worth really helps with that!

Andrea says July 19, 2012

Hey Andrea, well I just realized we both share same name 🙂 Well coming to the topic, According to me Net worth is another way of saying how wealthy or how poor you are. It’s the amount of cash you’d have if you sold everything and paid off all your debts today. Overall, your financial goal should be to increase and protect your net worth over time. The safest way to improve your net worth is to reduce the amount you owe, rather than relying on the value of the things you own to increase. For example, as recent events have shown, property values can and do fall at times. Rising interest rates will also increase the cost of your debt. Amazing article to say the least.
Andrea Jones

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