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Net worth is an important metric in personal finance. Take everything you own (your assets - cash, investments, car, house, etc.) and subtract from that everything you owe (your liabilities - mortgage, credit card debt, car loans, student loans, etc.), and the resulting number is your "financial worth" (or net worth) at that point in time.
If the number is negative, then you owe more than you own and you have a negative net worth. If the number is positive, then you own more than you owe and you have a positive net worth. Knowing your net worth is important because it lets you know where you stand, financially speaking.
There are so many ways to keep track of net worth, and there’s no one “right” way to do it. The important thing in keeping track of your net worth is to select a methodology that works for your situation, then apply it consistently. While some people check their net worth every month (not I!), it's okay if you don't want to do it that often. Once every 6 months or once a year works too. Over the years, ideally your net worth will be steadily increasing as you accumulate more assets and pay off your loans.
I find that a quick back-of-the-envelope calculation of net worth works for me. One of my first data points I have is from January 2007, when I had a -$4,300 net worth. As of December 2009, my net worth is around $51,000. So I’ve have increased my net worth by roughly $18,000 per year, from a combination of increasing savings and paying off my student loans. I’m proud of what I’ve done, but if I get the position that I’m hoping for I promise to do better. (Just in case the Universe is listening!)
I don’t include the book value of my elderly Honda or my personal possessions because (1) they are not worth that much and (2) excluding non-investment assets gives me a more realistic view of my net worth. I’d rather see that I have a $10,000 net worth with only my investments rather than a $12,000 net worth that includes my car and personal belongings.
Currently, I don’t own a home. If I did, I would likely put the home equity value (market value minus the book value of mortgage debt) in assets and re-evaluate that value once or twice a year for simplicity’s sake.
So here’s how I calculate my net worth:
Assets:
- Bank Checking & Savings Accounts + Money Market Fund = Total Cash
- Equities + Fixed Income = Total Retirement Investment
- Cash + Retirement Investment = Total Assets
Liabilities:
- Credit Card Balance* + Student Loan Balance = Total Liabilities
Net Worth:
- Total Assets – Total Liabilities = Net Worth
*I pay off my credit card bill every month but the bill is due in the middle of the month, not at month-end. I calculate net worth at month-end, so whatever balance I have accumulated up to that point should be reflected in the net worth.
How do you calculate your net worth? Does it differ from the approach I use?
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