How Do I Calculate My Net Worth?
And why it might be more important than what you are earning
A net worth statement is one of three statements that are critical to understanding your financial situation.
- A cash flow statement which is used to help with the timing of income and paying bills on time.
- An income and expense statement will offer details of your actual spending and earning of income.
- A net worth statement offers a snapshot in time comparing what you own vs what you owe.
While all three are critical to understanding your financial situation, a net worth statement offers you a picture of how close you are to achieving specific financial goals.
Definition of Personal Net Worth Statement
Before we go any further, let’s more clearly define what is a net worth statement as well as what amounts should be included. A net worth statement lists all of your assets of value and all of your liabilities. The difference between your assets minus liabilities is your net worth. Net worth is calculated at a specific point in time. Finally, a positive amount is more desirable than a negative amount.
“All of your assets” can be a little misleading. Besides the obvious such as your bank accounts, retirement accounts, and current value of your home, it can also include other assets. Some personal bloggers consider the value of their automobiles. Owning collectibles with a resell value such as jewelry or antiques are also considered assets.
To keep things less complicated, I suggest keeping it to your bank accounts including retirement and the current estimated value of your home. Unless you intend to sell your collectible collection and already have a price for it, leave it off your net worth statement.
“All your liabilities” is not misleading. This is more straightforward. If you owe money to anyone or any institution, then list it. This includes all of your outstanding credit card debt, student loans, automobile loans, and personal loans. You also need to list your mortgage and line of credit that you have outstanding.
A specific point in time
A personal net worth statement will fluctuate and does not stay the same. Balances due to creditors will increase or decrease over time. The amount in your retirement account should be increasing (unless you are retired and are drawing down funds) and your bank balance will fluctuate. This is why it is a specific point in time. The easiest time to prepare a net worth statement is usually at the end of a month when you receive statements from your bank, financial institutions, and credit card providers. Of course, you can look up your balances at any time online.
What Does a Net Worth Statement show?
It is the most accurate snapshot of your financial health. It is usually easier to prepare than a budget. It is not directly associated with your income. Meaning there are low income earners with very large net worth. One example was Ronald Read, a janitor who accumulated $8 million.
Preparing a personal net worth statement is an easy exercise compared to collecting and reviewing your spending vs income. It can be one of the first calculations you can do if you are trying to assess your financial health. It may be a surprise to you when you put the numbers onto a paper. If you find that it is a negative number, then you may want to consider seeking professional help. Calculating your personal net worth is one way of gauging your financial health.
Have you calculated your personal net worth? What did you learn from preparing your personal net worth statement?