Financial Basics: Calculate Your Net Worth
Whatever your financial goals in life – whether they include buying a new house, taking a trip to Europe, funding your children’s college educations, having enough money for a comfortable retirement, or all of the above – you are more likely to reach your goals if you do some planning. The fact that you are reading this indicates your desire to plan and to take control of your financial life.
After you’ve set your financial goals, the next step is to determine your current net worth. Only when you know where you are today can you calculate how far you have to go to reach your financial goals in the future.
On a sheet of paper, list everything you own (your “assets”) and everything you owe (your “liabilities”). Subtract the total liabilities from the total assets; the result is your current “net worth.”
In doing this exercise, it’s important to review the actual documents for the specific assets and liabilities and accurately record account numbers, identification, and dollar amounts. It’s easy to forget details about assets and liabilities and to list misleading information.
After you’ve arrived at your current net worth, ask the following questions:
1. Has your net worth increased since you last did this listing? If it hasn’t, you need to determine the reason and perhaps make some changes in your spending, saving, or other financial habits.
2. Does your net worth statement reflect a preference for personal assets such as an expensive home, cars, furs, and jewelry? Your balance sheet should show a concern for acquiring investment assets, not just personal assets that are far less likely to increase in value or produce income that will help you meet other financial goals.
3. Is your debt out of proportion? If your sheet shows excessive debt, especially for personal consumption, that’s a signal to review your spending. Keeping debt under control is essential in good financial management.
4. Have you given enough thought to money needed for retirement? If your sheet shows total neglect for accumulating funds for retirement, you’ll want to make some changes as soon as possible.
5. Are your assets diversified? Diversification is a good hedge against inflation and changes in the economy. Having all your eggs in one basket is seldom a good idea. Also, don’t keep excess cash in no-interest or low-interest accounts unless you have an immediate need for the cash.
6. Where do you want to be three years, five years, and ten years from now, in terms of your net worth? You might determine this by doing projected net worth calculations for three years, five years, and ten years from now.
Conduct a net worth calculation like this every year in order to chart the progress you’re making in increasing your net worth.