Do
You Know Your Net Worth?
Let’s
say you have a destination in mind. And, as luck would have it, you also h
What
Is Net Worth?
Your
net worth is the total value of everything you own reduced by any outstanding
liabilities. Or, to put it another way, net worth is the difference between what
you own and what you owe.
How
Do I Calculate It?
To
calculate your net worth, add up the market value of all your assets. List what
you have in your savings and checking accounts and don’t forget to include
certificates of deposit (CDs). Also, if you have a bank safe-deposit box that
you haven’t opened in years, now is the time to take an inventory of the
contents. You may find hidden sources of cash in savings bonds, life insurance
policies, corporate bonds, stock certificates, and other documents you put away
for safekeeping.
If
you own a house, list its current market value, referring to prevailing sales
figures in your neighborhood as a guideline. Include the value of your car; the
cash surrender value of life insurance policies, personal property such as
jewelry, artwork, antiques, and collectibles.
Estimate
the total market value of your securities and investments as of the date the
balance sheet is compiled. Include stocks and bonds, as well as mutual-fund
shares, Treasury issues, and money-market investments. Refer to the newspaper or
check with your banker and stockbroker to help you assess the current market
value. If you have IRAs and other retirement plans, be sure to add in the cash
value of each account.
Pension
funds also should be included in your list of assets, but only if they have a present
value. If you are not yet vested and the funds have no current measurable worth,
you should not view them as assets. The same is true of any other resource that
you can access only by satisfying certain requirements, such as working a
minimum number of years at one firm or reaching a specified age.
After
you determine the total value of your assets, total your liabilities. At the top
of the list for most families is money owed on their mortgage. Other common
liabilities are outstanding home equity loans, student loans, car loans, credit
card balances, loans for furniture or other items being paid on installment, and
taxes owed. Also, be sure to include balances owed to doctors, dentists, and
other professionals whose services you use.
Now,
subtract your total liabilities from your total assets. The resulting number is
your net worth, a baseline from which to measure your financial well being going
forward.
Now
You Can Take Charge
By
itself, a net worth statement is a way to take the “pulse” of your financial
standing at one particular point in time. But don’t underestimate the
importance of this measurement — it’s a benchmark against which all future
readings will be evaluated, a means of putting your finger on the health of your
financial progress. In other words, if you are striving to reduce consumer debt
and accumulate assets, a semi-annual or annual net-worth checkup will provide
you with a concrete and measurable account of how close, or how far, you are to
obtaining your goal.
If
your net worth this year turns out to be negative, don’t despair. A net worth
in the red doesn’t mean that disaster is a heartbeat away. Instead, it simply
means some belt-tightening and sound financial planning may be in order. Again,
rather than panicking, focus on the valuable information you’ve just gained;
knowing what’s “broken” not only allows you to fix it, but the insights
you’ve picked up along the way will help ensure that this situation won’t
ever happen again.
Make
an annual ritual out of refiguring your net worth. Not only will it be
gratifying to see your financial picture improve, but also the resulting
knowledge can help you budget, devise an investment strategy, and even plan for
retirement.