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The Worth of Net Worth

Start ArticleFinancial standouts bear witness to this simple truth:   In order to get where you want to go, you have to know where you are.

When it comes to personal finance, knowing "where you are" is really quite simple. And monumentally important. We accomplish this by calculating our net worth.

What's "net worth?" Well, put simply, it is:

More educated types might define it as [All household assets] minus [All household liabilities], but the point is the same.

You calculate your net worth by filling out what is referred to as a balance sheet. Your net worth might be positive, or, if you're young and/or have rung up significant debt, it might be negative. Because money constantly flows into and out of your life, your net worth is a snapshot in time, changing from minute to minute. It changes, for example, when you are paid interest. It changes when you are charged interest.

Net worth is what you have, right now, to show for all the money you've earned over your lifetime.

Financially speaking, net worth is the here in getting from here to there.

Calculating Your Balance Sheet

Basically, there are three steps to completing a balance sheet, and thus determining your net worth. I like to do this at the end of each month, but many experts suggest that an annual calculation is enough. If you've never completed a balance sheet for yourself or your family, then the time to do it is last week.

(Actually, programs like Quicken can, if you have input all the data necessary, pretty much tell you your net worth on a continuous basis. Notice the bottom left of this Quicken screenshot. How's that for staying in touch?)

Many folks resist — often indefinitely — creating their personal balance sheets. They're too afraid of what they'll find. Please don't be one of them. A balance sheet is only a "research process," and it isn't the research process that should frighten us. No, if we're going to be frightened, we should quiver at the thought of what chaos might overtake our financial lives if we keep them boxed up and at the back of a dark closet. Technically, your net worth is all about the right now. But it is also a guidestick for looking ahead. It is a scoreboard, and it will change. The next month, the next year, the next decade of your life . . . all of these are going to happen, regardless of whether you muster up the courage to improve them or not.

You can open this door, see what's inside, and make it better. Really.

You can.

1. Gather up all your records: List all your assets and their corresponding values.

Use the internet, and be as precise as possible. Acquire and use your true account balances and investment values. Use fair-market values for real property (homes, cars, etc.) and other fixed assets. Do not forget to include any monies owed to you, no matter by whom, unless you know you have no hope of collecting such funds. Don't forget any security deposits which will be due you from utility companies, apartment complexes, and so on.

Above all, be conservative, be diligent, and be honest.

2. List all your liabilities (debts) and their corresponding balances.
Don't forget to include any past-due or currently-due bills. Again, be honest with yourself: List all your debts, all your financial obligations, and use their true balances. Be comprehensive. Fiction may be great for getting your mind off your daily desolations, but it serves absolutely no purpose on your balance sheet.

Remember: The goal is to know exactly where you stand.

3. Calculate your net worth.
Just like the formula above says: You're going to tally up your assets, then your liabilities, and then subtract the latter from the former. Once you reach this point, you have several options. Because I can be numerically challenged, my personal preference is to let a spreadsheet grind up all the numbers and do the math dirtywork. A spreadsheet like . . . this one:

Balance Sheet / Statement of Net Worth (Vers. 1.5)
  Size:   43kb     Macros:   No.     Modified:   2007-04-26

[Includes Printable Instructions (PDF)]


If you'd rather do this by hand, there is also a balance sheet form (.pdf) available. Because it is from an outside source (Oregon State University Extension), some of the accompanying terminology varies from mine. But the concepts should still be self-explanatory, and the results the same.

So What's the Point of This Train Wreck?

Pure and simple: Net worth is how we keep score with our money. And ever since Caveman Stan first tried to take out that loan on a set of low-profile log wheels, financial authors have elaborated on the topic of net worth. No reason for me to stand in their way now, right?

Add the figures for liquid assets and fixed assets, and subtract from that the figures for liabilities. In the most simplified, concrete, material sense, this is your current net worth. That is what you currently have to show for your total lifetime income; the rest is memories and illusions, as far as the reality of balance sheets is concerned.
    — Joe Dominguez, Your Money or Your Life [Review]

Only you can decide to stop lying about your money — maybe you have been spending more than you earn, or pretending to others or yourself that you have more than you do. Only you can decide to always tell the truth.
    — Suze Orman, Laws of Money, Lessons of Life [Review]

When compared over time, net worth figures tell you some interesting things. Are your debts under control? Is your indebtedness growing faster than the money you're saving? How well are you investing the money you save? Do your investment accounts generally rise in value? Or are you losing money faster than you can put it away? How much money could you lay your hands on in an emergency? Are too many of your assets tied up in illiquid items?
    — Jane Bryant Quinn, Making the Most of Your Money

Before you can move forward in a meaningful way, you need to candidly assess your current financial position. Many financial professionals view your net-worth statement as the measurement of your personal wealth. Many people with average to high incomes have relatively low net worth. The financial challenges facing most Americans are not dependent on the amount they earn but on how they manage what they earn.
    — Steven B. Smith, Money for Life [Review]

It is critical that you be completely honest with yourself on the value of your assets and make sure you have created a comprehensive list of all debts. The first time you see this number in black and white, you may be startled or disappointed. The idea here is not to cast you into deep despair, but to see where you are today and to provide a benchmark to measure against in the future. Place a date on the statement you have just created and be prepared to create a new statement every three to six months. You will be amazed at how quickly you can make meaningful progress when you have become committed to following the path to financial fitness.
    — Steven B. Smith, Money for Life [Review]

[Calculating your net worth] makes you more conscious of what is happening in your financial life. It is important for two reasons. First, it tells you in objective dollar terms the tangible resources you have to work with to fulfill your goals. Second, it lets you know just how close you are to enjoying the freedom to follow the path you have chosen. The whole point of building a larger net worth is to provide the wherewithal for living expenses while you do what you most want to do.
    — George Kinder, Seven Stages of Money Maturity

Some [of our financial-course graduates] have made graphs to show the increase in their net worth over time. They set targets for attaining a certain amount of money by a given time, and then chart their results. This can be very rewarding. You have more control than you think over how you spend or invest your money.
    — Maria Nemeth, Ph.D., The Energy of Money

It can be very helpful (and motivational) to see how other folks handle this matter of net worth. Financial bloggers, as a rule, do this very thing all the time, using their blogs and the internet to foster discussion and accountability. In fact, you can head over to my blog, Money Musings, and at the beginning of each month, you'll probably find me discussing my net worth as of the end of the previous month.

And cussing it, too.