Friday, April 20, 2012

Calculate Your Net Worth

A valuable exercise to help you determine if you are winning with money is to calculate your net worth.  This is a useful method to measure your financial progress. Your net worth is the value of all your assets minus the total of all your liabilities. For our purposes here, assets are anything you own – your house, cars, furniture, boat, jewelry, savings, etc. Liabilities are money you owe (debt), such as mortgages, car payments, student loans, credit card debts, etc. To be clear, your net worth should increase over time.
This is easy to do and will usually only take a few minutes, so give it a shot.
   1. Add up the value of all your assets. 
   2. Next, add up the value of all your liabilities. 
   3. Subtract the total of all liabilities from the total of all assets. 

The result is your financial net worth. 
Here is the net worth calculation from my friend Dan. He is 42, married, and has three kids. Your situation might not look anything like Dan’s, but that’s okay. This is just an example to show you how to do it, not to suggest what yours will look like. 
House: $250,000 (fair market value, check for estimate)
Car: $18,500 (fair market value private sale, check for estimate)
Savings account: $15,000 (actual account balance)
Furniture, appliances & house wares: $8,000 (okay to guesstimate here)
Artworks: $5,000 (estimated fair market value if sold)
401k: $85,000 (actual account balance)
IRA: $5,500  (actual account balance)
Mutual Funds: $27,800  (actual account balance)
College fund: $7,200 (actual account balance)
Total Assets: $422,000
Liabilities:  (actual account balances)
Mortgage: $196,500
Car loan balance: $7,500 
Credit cards: $3,200 
Home equity loan: $6,500 
Medical bill: $1,900  
Total Liabilities: $215,600
Assets of $422,000 minus liabilities of $215,600  = a net worth of $206,400.
It is worth noting in the example above that once this family retires all debt other than their mortgage, their net worth will increase by nearly $20,000 or 10%. Increase is the goal, so paying off these debts would be a good decision.

Marc’s Wealth-Building Advice

When making a financial decision – this includes any large commitment of resources (house, business, car, education) or smaller recurring commitments (cable, cell phone, club memberships, any payments) – ask yourself, “How will this decision affect my net worth? In 1 year? 5 years? 10 years? 30 years?" This is a useful exercise, because your net worth should (in a perfect world, or even in an imperfect world like ours) trend upward over time. It is valuable to get into the habit of making decisions that increase rather than undermine progress in this area. If a financial decision will negatively impact your net worth in the short term, you should proceed carefully. If a financial decision will negatively affect your net worth in the long term, then you should pause and reconsider.
Remember, financial net worth should not be confused with your actual worth. We are worth much more than our bank balances. One problem in our society is that we tend to attach too much of our personal worth to our net worth.  Don’t fall into that trap. Your money position is not the end all and be all of life. Net worth calculations are simply a useful method to measure your financial progress. 
As you save more, invest well and retire debts, your net worth will increase. As long as you are seeing an overall upward trend throughout your working life, you can take comfort in the knowledge that you are heading in the right direction for wealth building.
Yours in prosperity,

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