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Have you ever been lost? Have you ever used a map or GPS to get somewhere? Do you feel lost when it comes to money?
I like to think of personal finance like a road map. You have a destination in mind (if you don’t that should be your first step! More on that in a future post….). Once you know where you want to go, you need to figure out where you are. It’s kind of like when you walk into a mall and want to find the store you need to go to. You find the store you want on the map, then determine where you are, so you know how to get there.
The first step to know where you are, is to determine your net worth. Financial Net Worth is one of the best ways to measure your financial health as well as track your progress.
What is your net worth? Basically, it is your total assets minus your total liabilities. I like to track my net worth on a monthly basis, as we pay down our debt and add to our savings. It helps me to see progress made in our overall ‘big picture’. How often you track your net worth is a personal decision. Maybe a quarterly check is what helps you stay on track and see your progress. Perhaps an annual check is more appropriate. I do this exercise monthly just because it helps keep me motivated as I see my assets grow, my liabilities decrease and my net worth get higher! This is exciting stuff!
How do I figure my net worth?
FIRST, LIST ALL OF YOUR ASSETS.
There are many opinions on what counts as an asset. Personally, I only use items that I could sell to bring in significant amounts of cash. For example, I count our minivan as an asset (although vehicles are rapidly depreciating assets!), but I don’t count my couch or my desk in my office.
You can include such items as:
- valuable collectibles
- cash, savings accounts
- checking accounts
- retirement funds
- your home
- real estate
One asset that you may choose to include an education fund. However, I don’t choose to count these as part of my assets. We have 529 plans set up for all of our children, and I do not include these as part of my personal assets, because I wouldn’t use them to cover a liability. And I sort of don’t ‘own’ these accounts anyway because the money in them is earmarked for my children’s education, not for my use.
Make a list of all of your assets, and what they are worth. Add the amounts together and you have your total asset amount.
NEXT, MAKE A LIST OF ANYTHING YOU OWE.
These are your debts, or liabilities. These can include:
- auto loans
- loans from family members
- student loans
- credit card balances
- money owed to the IRS
- medical debt, and so forth.
Add all of these debts together, and you have your liability amount.
YOUR LAST STEP IS TO SUBTRACT YOUR LIABILITIES FROM YOUR ASSETS.
How does it look?
Do you have enough assets to cover liabilities? Calculating your net worth can be exciting as you see that you are ‘worth’ more than you might have guessed. Or it can be painful to see that you actually owe more than your assets.
If your net worth is negative, do not despair. Use this new knowledge to develop goals to bring your net worth to a positive and ever growing number. As I mentioned, I like to check my net worth monthly, to see how much I can increase it each month. By eliminating debt (liabilities) and increasing savings (assets), little by little that net worth number starts to grow.
Every time you make one of those debts smaller, or one of those assets larger your net worth will increase. So net worth is increased by saving and investing money, paying off debts and decreasing spending.
Now can you see why calculating your net worth should be your first step in beginning your financial plan? If you don’t know where you are, you won’t be able to figure out how to get where you want to go.
By understanding where you are, you will begin to see how important a spending plan is, how to analyze your purchases, increase income, decrease debt and liabilities, and where to place your priorities in order to get from “You are here” to your destination.
This week, with your spouse if you can, list all of your assets, and all of your liabilities and determine your net worth! And, if you like what you have learned, subscribe to make sure you receive the latest posts and information to help you become financially confident and informed.