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Your Net Worth

This chapter is devoted to a discussion of your net worth. Just remember to not confuse who you are as a person, with the sum of your financial situation. Some times we get caught up with “Keeping Up With the Jones”. Who has the nicest car, home, takes the best vacations etc. Status is important to some people. But remember, “The most important things in life are not things.” Having said that, we still want to feel like we are making progress in our lives financially so a simple scorecard of that progress is your net worth. Think of your net worth then just as a scorecard to measure how you are progressing toward your goals.

What Do You Have Now

Every journey needs a starting place. Before you start off on a family vacation, you take an inventory of what all you need to bring, you then pack your bags and maybe even recheck everything before you depart.

Figuring out your net worth (what you have today) is a lot like family vacation planning. Establishing your net worth is an essential step to personal financial planning because it provides you and your family with a measurement that helps to determine your financial progress. If you get off track a bit, your goals and this measurement of your financials will help tell you if you need to make any adjustments.

Your net worth is all of your assets minus all of your liabilities. By reviewing your net worth statement annually, you will be better able to see the results of your planning efforts and the amount of funds you have to work with for future planning. Comparing your financial goals to your net worth helps you determine if adjustments or in order or if you are right on track.

Generally speaking your net worth should increase every year. If you find your net worth is not increasing annually, you may wish to consider seeking a professional financial planner to help develop a plan to get this going in the direction you want.

You can determine your net worth on a simple sheet of paper or you can use an online service like quicken or mint.com. If you have a computer, this can be done as a simple spreadsheet, or you can just use a few sheets of paper.

Let’s start with assets. List your current assets first. A current asset is any cash or other items that could be converted to cash quickly. This includes cash in the bank, savings, all of your stocks, bonds, mutual funds etc. held in your name and not subject to a tax if withdrawn. If you have a cash value life insurance policy, you can include the cash value (more on insurance later). You can also include any money owed to your by others. Now add these items up. This is now your current assets.

Now let’s look at items that are not easy to convert to cash, or your fixed assets. This included your home, cars, motorcycles, household furnishings, sports and hobby gear. All of these items can be converted to cash, but it will take some time to list them for sale, find a buyer and agree on a price. List these items as assets even if you owe money on them, we will come to debts in a minute.

The last section on your asset list includes all of your deferred assets. This is anything you expect to receive in the future, company savings or profit sharing plans, pensions, retirement plans are all deferred assets. List these and add them up.

Now to get the total of your assets just add all of your current, fixed and deferred assets. This is your total assets. Set this number aside for a second, so we can turn our attention to liabilities.

Liabilities are what you owe to someone else. This includes the mortgage on your house, personal loans, car loans and credit card debt. It might also include any student loans, lines of credit and even if you took out a loan from a retirement account or cash value life insurance policy (You should never do this BTW).

Now total your liabilities, and subtract this number from the total of your assets. There you have it, you just figured out your net worth.