Understanding your financial net worth is an important to anyone looking for an objective review of their finances. Net worth should be tracked regularly in order to allow you see trends in your financial situation. Tracking net worth is a snap shot of your net worth at a specific moment in time.
Calculating your net worth regularly will serve as a financial report card to assist in evaluating your financial health.
Net Worth Defined
Net Worth is simply your assets minus your liabilities or Assets – Liabilities = Net Worth. Your income impacts your net worth, but is not actually part of the net worth calculation. Net worth may be positive or it may be negative.
So if your assets total $275,000 and you owe $135,000, you would have a net worth of $140,000.
This is easy enough to understand, but how you define assets and liabilities will greatly impact your calculation of your Net Worth.
Assets
An asset is something that you own and has a cash value. It is important to remember that an asset’s value is not what you think it is worth, or what you paid for it, but what someone else would pay to purchase the asset from you. Generally things like real estate, personal property (be very careful with valuations on your cars, jewelry, precious metals, art, and collectibles), investments, bank and brokerage accounts, retirements, crypto currency and cash itself.
Liabilities
Liabilities are simply your debts, or the amount of money that you owe. Typically, loans (car, personal, and student), mortgages, credit card debt, unpaid bills, etc. These are generally relatively easy to calculate as you generally make regular payments or have invoices associated with liabilities.
Classification of items as Assets or Liabilities
Generally it is clear if something is an asset or a liability, but there is substantial debate in the financial sectors as to how your personal residences and businesses should be classified. That discussion is too broad of a topic for this post, but an initial discussion can be had by a read of Rich Dad Poor Dad.
You will need to decide how to classify your personal residence (provided you own your own home). When just starting with the calculation of your net worth, go ahead and count your home as an asset. Simply take the current value and subtract the cost to sell it and any debt you have on the house.
Businesses become more difficult to classify, but it is usually wise to just treat the assets of the business as assets and balance those with the liabilities of the business.
Why Tracking your Net Worth is Important
Net worth is not an end all be all evaluation, it is an important tool to evaluate your financial health. Liabilities and assets are not all created equal; there is a substantial difference between a non-recourse and a personally guaranteed loan. Additionally, assets like stocks can have wild swings in their valuation in extremely short periods of time, take the COVID-19 crisis of 2020 where many stocks saw losses of up to or exceeding 50% of their value in a matter of days and weeks.
Start Tracking your Net Worth Today
Start tracking your net worth today with our Net Worth Tracking Spread Sheet. The sheet includes pre-loaded cells to compute certain fields and assist with creating graphical representations of your Net Worth. Please subscribe to the blog and continue to receive simple, yet helpful information for the modern dad.
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