Once you make a mental commitment to take charge of your money the next step is to learn how to calculate net worth. It is usually quite easy to determine your individual net worth, but it can be a little more complex for some people, depending on the types of assets and obligations involved.
It is amazing how many people purposefully avoid knowing about their own finances at all. Many people never even open their bank statements! I really don’t understand that one.
Note:
Anyone who wants to be successful with their money needs to know where they are as much as where they are going.
Anyone who wants to be successful with their money needs to know where they are as much as where they are going.
Otherwise, how can they map a way to get where they want to be. Your individual or family net worth statement tells you where you are from month to month.
Learn How to Calculate Net Worth
First start balancing your check book if you don’t do it already! Next make a current list of your income sources and amounts. For most this may be no more than a monthly salary but for others, especially the self-employed or seasonal workers, this may involve totalling a year’s income and dividing by twelve to get an average.
Then learn how to make a net worth statement. Make a list of your assets. Many people try to list too much. If you are just getting into serious work on your money program try to keep it simple. Don’t worry about stamp collections, tools, or jewelery unless they are real investments (which isn’t likely). Just try to list all the monetary assets.
Include all checking and savings accounts, retirement accounts like 401k’s and IRAs, and stocks or bonds. Add anything else that can be easily converted into cash. You will want to include the value of your home (if you own it), any other real estate, and perhaps your automobiles (certainly do so if you have loans against them or they are especially valuable), but probably not any other personal property.
Make a similar list of obligations. This list includes your mortgage if you have one, car loans, personal loans, educational loans, and credit card accounts, etc. Don’t leave any debts out of your individual or family net worth statement, no matter how small..
Now comes the interesting part. Add up each list, then subtract your liabilities from your assets. Hopefully this will be a positive number. Unfortunately, often it is not. Whatever it is, this number is an important number for you to know: it is your personal or family net worth.
The Value of a Net Worth Statement
What is a good number? It is not particularly relevant and it is never a good idea to think too much about how we compare to others, but I know many would like to know. The most recent figure I have is for 2009 when the median net worth in America was $96,000.
If yours is much less or even a negative number, don't panic. You are now on a new course and you may be amazed at how quickly things will change.
The important thing is to see how we want to use this information. Checking your net worth, as it increases or decreases from month to month, is the best way to measure of your success in reaching your financial goals. Individual parts of our financial life may go up and down. But it is the big picture provided by our net worth statement that measures our overall progress.
Note:
Only by maintaining individual net worth statements can we have an accurate record showing whether we are getting ahead or behind with our money.
It is important to keep all the records you need readily available and take time once each month to calculate your net worth. It only takes a few minutes at most once we have established the practice. Only by maintaining individual net worth statements can we have an accurate record showing whether we are getting ahead or behind with our money.
Computing your net worth once is interesting, but having this figure for several months provides important information to guide all our financial planning. Learning how to calculate your net worth statement is vital to personal financial success so don't neglect it.
Putting this Information to Use
With this information at hand we can compare each month’s total to the month before to see our ongoing progress. Equally important, with our net worth adjustment to guide us we will be able to make corrections quickly, knowing the basis for any change.
