What Is Your Net Worth?
Money in, money out, a transfer here, automatic debit there. Sometimes we almost need a full time accountant just to keep track on all the comings and the goings of our hard earned dollars. The more accounts and investments you have, the easier it can be for money to float around in the ether. You know you work hard, you haven’t bought a Harley in the past month so you must be getting further ahead right?
Sometimes we can all feel lost in a crowd when it comes to our finances. It is no good guessing that you are on track. One thing I can wholeheartedly encourage everyone to do, if you haven’t already done so is to KNOW YOUR NET WORTH. It is imperative to your financial growth!
It is very hard to aim at something without having measured increments to gauge your progress. Imagine asking your basketball coach about who won the game and getting a response like “You got some in. They got some in. I think you won?”
There is a fabulous saying: What gets measured, gets managed. You know those charity telethons with those humongous goals to raise $10 million for the hospital upgrade? There is always a scale that denotes the amount donated. Why? Because psychologically we are instantly excited and motivated when we see dollar figures ticking over and momentum being gained.
Your savings journey is no different. Know as accurately as possible your net worth. Write it down, monitor it and manage your financial growth. If you drop behind in a month, note down why and take steps to mitigate any future losses.
The calculation of net worth is super simple:
Assets minus Liabilities (Money owing and taxes) = Net Worth
Calculate the values of your assets as a best estimate. Personally, I don’t tend to calculate motor vehicles as they sink like a stone in value over the years (unless it is a historical vehicle).
The way to work out the value of your home and investments is to spend 30 minutes scanning sold properties on the internet. Compare apples with apples. Stocks are easily by checking on the internet too.
You may even find it helpful to calculate 3 prices:
- An ‘I wish’ price
- A ‘Sounds About Right’ price, and a
- ‘No Way’ price.
From that point I would always choose the middle price. The process above might look unnecessary as you could just start with a ‘Sounds Right’ price. The challenge is that we aren’t always quite so objective when it comes to the appraisal of our beloved family home.
Now that you have a plausible valuation, take away any loans and debts. To be even more accurate I like to calculate the tax owing on any potential profits made.
The next step is to write your net worth down on a piece of paper that you won’t lose, a document or a spreadsheet. I use a spreadsheet because I calculate my debts again at end of each month with a fine tooth comb.
Watch your net worth carefully and celebrate each saving milestone that you make. Maybe you can plan a little celebration with your family each time you save an additional thousand. Associate pleasure with saving and you will be guaranteed to form good habits for your financial future.
What's Your Net Worth?
July 22nd, 2015 at 11:57 am
July 22nd, 2015 at 10:03 pm 1437602587
July 23rd, 2015 at 01:21 am 1437614503
July 25th, 2015 at 12:33 pm 1437827613
That said, I've stopped now. I don't really need to know precisely at this time, as I am a generally good idea where I am at most of the time anyway. That's because my investment company (or you can use online programs like mint.com) do most of that work for me.
Another thing about net worth is to keep in mind that they might be somewhat slightly misleading as well. For example, most regular people include their house and car into the calculation. Well, a dwelling is an illiquid asset with revolving costs, but sometimes, people only calculate their market value minus mortgage. And transportation is a depreciating item... not sure if you can even call that an asset. Definitely not liquid. Plus, when most people sell it, they don't often get best market value.
It is actually possible to be "house poor" and yet still have a glowing net worth. Yes, perhaps you can reverse mortgage it or toss a HELOC on it, or maybe downgrade eventually, but I don't think that's necessary the most accurate financial picture one can get on their everyday life.
Plus, something like your house's market value isn't something that one may have done to improve anything in their financial life. I could be a complete bum, or in a coma, and wake up, look at the value increase, and pat myself on the back about how "financially savvy" I am. Right?
That said, I agree net worth is an easy and straightforward barometer check on one's financial life, but it's something that I think we need to take with a grain of salt. That's why I personally look at cash flow more nowadays. I want to see that both my earned as well as passive income are actually net positive as much as possible.
I also fully agree that a quarterly check on net worth is enough, though I used to update monthly as well.