Monday, July 6, 2009

Figure Out Your Net Worth

Saving Money Tip #159 - Figure Out Your Net Worth. In this post, I suggested doing a mid-year review of your finances. As part of that review I mentioned reviewing your budget, and your financial goals as well as creating a net worth spreadsheet. What is net worth? Net worth is almost exactly what it sounds like. It is what you are worth. In accounting terms it is assets minus liabilities. In layman’s terms, it is what you own (your assets) minus what you owe (your liabilities). Another way of looking at it is Liabilities (what you owe) + Net Worth = Assets (what you own).

So what is the point of figuring out your net worth? It figures out what you are worth at a given point in time. You don’t need to calculate your net worth frequently. That’s like someone who likes to sit there and count his money. Instead, it can be useful to compare your net worth from one period of time to another period of time to see how much it has grown (or lost). It can help you keep track of your long-term goals. You can figure out your net worth once per year, twice per year, or 4 times per year. More than that, it is probably not necessary. If you decide to do it once per year, then try to do it around the same time of the year. End of year or mid-year is a good time. This way you can have consistent comparison across years to give you a good idea of your progress. For example, you might have a Net Worth Statement from December 31, 2007 that shows assets of $30,000, liabilities of $20,000 and a net worth of $10,000. Then on December 31, 2008 your net worth statement might show assets of $35,000, liabilities of $18,000 and net worth of $17,000. This way you can see a yearly progression of what you own, what you owe and what you are worth.

So, let’s set up a net worth statement. Using an Excel spreadsheet or the equivalent is the easiest. But you can also do it on a piece of paper if you’d rather. I usually just do it in one column but the accounting way that I was taught was to put assets on the left column, and liabilities and net worth on the right column. Then the left column and right column were to be equal. First make sure you put a date on the Net Worth Statement. So on the top of the column put a heading “Assets.” Under the assets column list your savings and investment accounts and big assets such as your house, car, expensive jewelry, etc. – one per line. So your list might look like this:

June 30, 2009

Assets:

Savings account: $1,200
CD: $1,050
Money Market Account: $2,600
401 (k): $16,000
Roth IRA: $5,300
House: $350,000 (estimated worth)
Car: $8,000 (blue book value)
Diamond ring: $3,000
Other assets: $2,000

Total Assets: $389,150

Next you will list your liabilities. This is what you owe. You would include any credit card debt, student loans, your mortgage, car loan, and any other money you owe. It will look like this:

Liabilities:

Mortgage: $240,000
Car Loan: $2,000
Credit Card: $600
Loan from Dad: $800

Total Liabilities: $243,400

Next you calculate your net worth which is Total Assets ($389,150) – Total Liabilities ($243,400) = $145,750

Net Worth:

$145,750

Now you have your net worth for a certain date in time. Plan to calculate it again in 6 months or a year to see your financial progress. Notes: some people don’t put their material assets on their net worth sheets. I like to because if an item has worth and I can sell it, then I think it belongs on there. Second, you can break down your net worth statements by account. For example, your 401(k) account might include money in Stock Fund ABC and money in Bond Fund XYZ. You can list each account separately for more detail. (This is what I do.)

In Real Life (IRL) – Currently, I like to calculate our family’s net worth 4 times per year. Maybe it’s because I started out as an accounting major in college before I switched to finance. Or maybe it’s because I am such a numbers geek. Or maybe it’s because I have too much time on my hands. In any case, I like to see our progress during the year. I really don’t think it’s necessary to calculate your net worth more than twice per year, though, unless you really like to do so.

I have been calculating my yearly net worth for probably 15 years now or maybe more. There were many periods in my life that I just did an end of year net worth. Unfortunately some of those spreadsheets are probably stuck on a 3 ½ inch floppy disk somewhere, so I don’t have access to them. But I do have my net worth on our current computer as far back as the year 2000, so it’s neat to see the financial progress our family has made since that time (even when our net worth went down last year in the poor financial and real estate markets).

Remember, net worth just shows what your financial worth is at a given point in time. Tomorrow, the stock market could collapse, you can lose your diamond ring, or you might need to dig into your savings account. It does not predict or show what you will be worth at a future date. But it is still a useful tool to show where you are today financially.

1 comment:

twobarkingdogs said...

Mich - thanks for this. I have never done any real planning and really need to.

Can you e-mail me? I have a couple of questions for you .. Regards, Diane


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