This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Tuesday, September 4, 2007

Tracking Your Net Worth

Posted by Paul
One of the most valuable steps I have taken in recent years as I try to become more financially responsible is setting up a system where I can track my net worth.

This may seem like something that only an extremely uptight person would do, but I actually think that tracking your net worth is simple, useful, and (dare I say it) fun!

So why bother tracking your net worth? If you're interested in things like saving and investing and the accumulation of wealth, then your net worth is an excellent way to see how things are progressing.

So how do you determine your net worth? It's very simple:

1) Determine all of your assets. These are all of your retirement accounts, savings accounts, savings bonds, CD's, precious metals, as well as the value of your house. Pretty much everything significant in your life that has some worth.

2) Determine all of your liabilities. These are all of your outstanding debts. They include things like the remaining debt on your house, all credit cards balances, student loans, car loans, and essentially any other debt in your life.

3) Your networth = your assets - your liabilities.

A few interesting points when gathering all of this info:

a) I would recommend not bothering to include any account that changes a lot (like your main checking account for example). If most of your money is in your main checking account, then you have a problem.

b) Don't include your car as an asset (but do include your car loan as a liability). The only exception is if you have some sort of collectible car that you actually plan to have increase in value.

c) Do include the value of your house as an asset, but also include the money you still owe on your mortgage as a liability (in other words, you should only count the equity in your house as part of your net worth).

d) Don't include things like TV's, computers, furniture, etc, as your assets. As nice as they are, it's nearly impossible to accurately judge their value and it's probably falling all the time anyway.

Here is an example net worth calculation (with totally fictional data):

401k balance $10000
Savings Account $3000
Savings Bond Values $1000
House Value $300000
Total Assets = $314000

Credit Card Debt: $2000
Car Loan Debt: $8000
Mortgage Debt: $272000
Total Liabilities = $282000

Networth = $314000-$282000 = $32000

Once you start tracking your net worth, you can do some interesting things with it like:

1) Make sure your net worth is positive. If your net worth is negative this is a BIG problem. It means you owe more than you own, and that is definitely not a place you want to be.

2) See how your net worth changes over time. The hope is that over time your net worth should be trending upwards.

3) See how different things relate to your net worth. For example if you finance a new car, your net worth will probably drop significantly at the beginning (the loan will be a large liability) but over time as your pay off the debt it will be less of a factor in your net worth.

4) Does your net worth fluctuate more than you would like from day by day? Then perhaps you need to change your investments to less volatile investments.

Hopefully this will motivate you to calculate your net worth if you don't already. After all, most financial decisions are based on increasing your net worth, so if you don't track it how do you know how well you're doing?

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