It’s Not About Just About Income, Net Worth is the True Story

When many people talk about their personal finances, most of the focus goes toward income.  And while your salary is important, a bigger determinant of your long-term financial success is to regularly calculate and track your net worth.

This post starts off with a basic definition of net worth, why it’s so important to track and finally how to go about doing so.  Ready?  Read on!

So What is Net Worth?

The simplest definition I have for personal net worth is the amount of money you’d have left over after you pay back all the money you owe everyone else.

When you’re a kid, this is pretty simple.  Say you have $11.00 in your piggy bank and you borrowed $1.00 from your friend Kayla last weekend to buy a candy bar and a soda.  You’re current net worth would be $10.00 based on the following formula:

Net Worth = Total Assets – Total Current Debts

$10.00 = $11.00 (in your piggy bank)  – $1.00 (that you owe to Kayla)

As adults, we make things more complicated for ourselves.  We’ll get to that later so you know what to include and how to include it in your net worth calculation.

Why is it Important to Track My Net Worth?

T Harv Eker is one of my favorite financial authors and speakers.  His primary focus is helping people to change their money mindsets.  In his book, Secrets of the Millionaire Mind, he talks about the importance of focusing on your money if you want to improve your personal finances.  One of my favorite T Harv quotes is, “Where focus goes, energy flows and results show.”

Think about this in terms of your personal relationships.  I’m guessing you spend lots of time focusing on family members, friends and important relationships with co-workers.  And over time, this focus bears fruit, these relationships expand and pay big dividends for you and those who are in your inner circle.

Your relationship with money (or anything else for that matter) is no different.  When you place your focus and attention upon something, it is much more likely to grow than if you completely ignore it.  By calculating your net worth on a quarterly basis, you set these forces in motion and are much more likely to achieve your personal financial goals as a result.

OK, So How Do I Calculate My Net Worth

Recall our formula above:

Net Worth = Total Assets – Total Debts

Assets

Let’s start with Assets.  Open up a spreadsheet and create entries for any of the following categories that apply to you:

• Checking accounts (personal and business)
• Savings accounts (personal and business)
• Certificates of deposit
• Savings bonds
• The value of your home
• Retirement accounts – 401(k)’s, 403(b)’s, IRA’s, etc.
• Any after tax brokerage accounts you have.
• The value of any investment properties you own
• The value of your car(s)
• The value of any collectibles you own
• A valuation of any businesses you partially or completely own.
• The current value of your Health Savings Account
• The total of monies owed to you
• The net present value of your pension (more on this later)
• The net present value of your Social Security benefit (more on this later too)

Valuing Assets

For the following categories, simply grab the current value from your records, a recent statement or by going online:

• Checking accounts
• Savings accounts
• Certificates of deposit
• Savings bonds
• Retirement accounts
• After tax brokerage accounts
• Your Health Savings Account balance
• The total of monies owed to you

I personally grab values for these kinds of assets every time I calculate my net worth, which is once every 90 days.

There are other categories that I only calculate once a year to save time.  These include:

• The value of my cars – edmunds.com is a great resource for this
• The value of collectibles

It’s up to you whether you want to determine the value of these items every time you calculate your net worth or limit it to once a year.

Bigger assets that I do calculate quarterly include:

• The value of my home – using zillow.com
• The value of investment properties – also using Zillow.

Finally, there are some more difficult to calculate categories including:

• The value of businesses you fully or partially own.
• The value of a future pension benefit
• The value of a future Social Security benefit

If you’re a business owner, check out this article for a great introduction to business valuation.  You can either calculate this yourself or use one of several low cost, online services to help you with the math.

Valuing future pensions and Social Security benefits is also tricky and beyond the scope of this article.  You’ll need to make some assumptions on how long you’ll live, what inflation will be, how much Social Security benefits will increase every year and when you’ll start to collect these benefits.

You’ll then feed all of this into a separate spreadsheet to calculate the Net Present Value of this future set of cash flows.

If you’re a financial math junkie like me, the last couple of paragraphs have you ready to whip out your financial calculator and crank through the math to be able to include any pensions you have or your Social Security benefit.  However, if you’re like most (normal) people, your eyes have now glazed over and you can probably just skip these two categories for now.

Next to each of your Asset categories, plug in each of the values you’ve gathered.  Once they are all in, add them all together.  Label this result your Total Assets.

Debts

Let’s now move on to Debts, which is (hopefully!) a much shorter list.  In a new section of your spreadsheet, create entries for categories like:

• Mortgage on your home
• Balance on a home equity loan or home equity line of credit
• Balance(s) on car loan(s)
• Student loan debt
• Credit card debt (I’m really hoping you don’t have this category)
• Money you owe to other people

Each of these should be readily obtainable online or from your paper records.  Enter each of the values next to each of the categories.  Once you have them in, total them up.  Label this result your Total Debts.

Your Net Worth

You’ve done the hard part, now here’s the easy part.  Subtract your Total Debts from your Total Liabilities.  Enter this result on a separate line and label it Net Worth.  That’s it!

Now What?

Have you gone through the exercise and calculated your net worth?  If so, how do you feel about the number?  Regardless of how you feel now, set some goals for yourself.  These could include:

• Having a positive net worth by age 25.
• Being worth $300,000 by age 30.
• Being worth $1 million by age 40.

Once you set your goal, make a graph on a piece of paper.  Draw a line between where you are now and where you want to be so you can see what you need to do each year to achieve your goal.  You can then refer back to this chart to help guide your major spending and savings decisions and truly know whether you are on track for your personal financial goals.

Happy calculating and leave a comment below based on your experiences!