How To Calculate Your Net Worth

Today were going to talk about net worth and how you can calculate yours. Relax, theres no need to panic over the math involved it really couldnt be simpler. Most people have at least heard of net worth and know that a higher net worth is better than a lower one, but beyond that they dont really understand what goes into the numbers.

Net worth is composed of two parts, assets and liabilities. As mentioned in an earlier post (see resource list) an asset in its simplest form is something of value. To make things easy on ourselves we tend to ignore items of little value and consumable items. For example, your refridgerator would be an asset used in your networth calculation but the food in it would not, even though your food technically does have value. Also, be sure to keep in mind that an asset does not necessarily have to be something physical. For instance, if I owe you $100 that would be an asset to you because it does have value, but you cant touch it (yet). Dont worry, Im good for it

As a coach, my goal is not just to educate, but rather to try to prod you into taking some action. So here are your first few action steps.

ACTION STEP 1
Take a pad of paper and begin listing all of your assets. Dont worry about numbers yet, just start listing. Some people find it helpful to walk through their house room by room to compose the list. As mentioned above, ignore items of little value and consumables. I would lump clothing in with consumables, so dont include those. It may be helpful to think of an asset as anything you can sell. In the example I gave about having someone owe you money, you could sell that debt to someone else. In fact you may have done this in the past without realizing it. Lets say that you were out with a group of friends and you loaned John $20. Later you were hungry and Fred gave you $20. In return you told John to pay Fred the $20 he owed you. In affect you sold Johns $20 debt to Fred. And you thought you didnt understand high-finance!!

ACTION STEP 2
Now that you have your list of assets, its time to put a value to each item. There are two different camps when it comes to what values to list. One camp says you should list either what the assets cost you or what it would cost to replace them. If you intend to use this value for insurance purposes then this is probably the route to take. Otherwise, though, you going to come up with a value that is unrealistically high. The second camp, which is the one I would recommend you use here, is to list the value as what you could actually sell the asset for. This is number gives you a more accurate picture of where you are financially. This is also the way banks want to see it when you are looking for loans. If you dont know what something is worth, you can use websites like www.craigslist.com or www.ebay.com to see what similar items are selling for. To determine the value of a car I would suggest the Kelley Blue Book site at www.kbb.com.

ACTION STEP 3
Add up all the assets and put the total at the bottom of the column. If you want to really look like you know what youre doing you can line up all of the numbers and then put the total slightly to the right so that it looks like this:

asset 1 $500
asset 2 $200
asset 3 $300
Total Assets $1,000

Now that youve finished with assets, its time to turn your attention to liabilities. A liabilities is money you owe. In our earlier example of my owing you $100 we said that it would be an asset to you, however it would be a liability to me because it is money that I owe. Other common liabilities include:

credit cards
store cards
student loans
auto loans
personal loans
mortgage
back taxes
Many people confuse liabilities and expenses. Liabilities often have an associated expense but not all expenses have an associate liability. I know that sounds a little confusing, but I think an example might be helpful.

Imagine that you owe $1,000 on a credit card and that card has a monthly payment of $20. The amount you owe ($1,000) is the liability and the monthly payment ($20) is the expense. Expenses dont show up in a net worth calculation so we can ignore it until later. Now imagine that you have an electric bill that typically costs $40 per month. That is an expense, but you dont owe them any money beyond the expense so there is no liability. Of course, if you dont pay them for 3 months then that back amount owed becomes a liability, but typically utilities are expenses and not liabilities. Can you think of others?

Ok, time for action. I know this is the part nobody likes, but if you dont know where you are you cant plan where you want to be.

ACTION STEP 4
Just like you did in step 1, take your pad of paper and start listing all of your liabilities below the assets. As tempting as it may be, dont leave any out. No one but you will need to see this, so be perfectly honest. If you owe your mom $20, write it down. Remember, do not list expenses only liabilities!

ACTION STEP 5
Now take your list of liabilities and put dollar amounts next to each one. Dont feel overwhelmed. No matter how large these numbers appear, you can deal with it. All it takes is time and plan, and were here to help you with through it.

ACTION STEP 6
Add up all of the liabilities and put the total at the bottom of the column. Again, if you want to look like a pro offset the total just like you did with the assets. No matter how large your total liabilities are, you can deal with it. Do worry about how right now. You are simply creating a starting point so that you can measure your progress.

ACTION STEP 7 (FINAL STEP)
Youve done great so far and theres only one more step to go. The final step is to calculate your net worth. The formula is simply assets liabilities. For example, if your total assets were $2,000 and your total liabilites are $1,000 then your net worth is $2,000 $1,000 = $1,000. If your numbers went the other way and you had $1,000 in assets and $2,000 in liabilites then your net worth is ($1,000) in financial statements we put negative numbers in parenthesis so negative $1,000 is written as ($1,000). If youve followed all of the steps, your paper will look something like this:

asset 1 $500
asset 2 $200
asset 3 $300
Total Assets $1,000

liability 1 $500
liability 2 $500
liability 3 $1,000
Total Liabilities $2,000

Net Worth ($1,000)

It doesnt matter right now if your net worth is positive or negative. Remember, net worth is a snapshot of one moment in time and can change daily. Of course, there are free software packages out there which can calculate these numbers for you very quickly, but it is best to do them manually at first so that you begin to understand the realtionship between assets and liabilities. Youll begin to notice that paying a large bill will reduce your cash (asset) and your debt (liability). Before you make a purchase with a credit card youll begin to see these numbers in your head and youll realize that this purchase will increase your liabilities but not your assets, so you may think twice about making the purchase.

Once youve calculated your net worth, keep this paper in a safe place and every 3 months or so go through this process again. The important thing is to see your net worth climbing. In future articles we will discuss ways to begin building your net worth, but the first part is to understand the process.

Until next time, keep your eyes on your goals and never stop the pursuit!!