How To Calculate and Track Your Net Worth
Published 10/29/08 (Modified 2/17/12)
Recently, I made the decision to start tracking my personal net worth and financial status in a very public and revealing way - by posting my financial numbers online for all to see. The point of doing this was not to boast, demonstrate some fanciful financial bravado, or unnecessarily parade my personal finance publicly to satisfy the whims of voyeuristic readers. In actuality, the objective was to have a way to show people the importance of proper statistical tracking when it comes to smart financial planning. The purpose of calculating and tracking your personal financial net worth on a regular basis is not just so you can match yourself against others to see how you're doing in comparison, but it's also to help you evaluate the current health of your finances. Like using a gauge to take your blood pressure reading or running blood tests to get a nutritional analysis, the point of net worth tracking is to use snapshots of your financial condition to help you make better decisions in furtherance of your personal financial goals.
I don't think it's an over-emphasis to stress that proper money management is a very critical component of responsible living. Other than how you handle your family, friends, personal relationships, or perhaps religious views, how you manage your money probably has the greatest effect on the quality of your daily life. The abundance or the lack thereof of money can determine whether you live an existence of paycheck to paycheck living or determine whether you are able to live a life of complete financial freedom. It can also determine the type of home you can afford and the type of neighborhoods you can afford to move into. With its powerful trickle down effects, the way you handle your money also has far reaching influence on family relationships as well, affecting how your children are raised and possibly even determining their futures. Knowing how to calculate your current financial net worth and knowing how to track it on a regular basis will help you make better saving and investment decisions for yourself and your family. At the very least, it will force you to actively interact and stay abreast of your financial affairs, and stay knowledgeable and motivated about where you are on the road of life.
Calculate Your Personal Net Worth On A Periodic, But Continuous Basis
Your financial net worth is basically a snapshot of your current financial health at a moment in time expressed by a dollar denominated amount. In the world of personal finance, your personal net worth is akin to what corporations and accountants refer to as the balance sheet. Contrast that with something like a cash flow statement, neither your financial net worth statement nor your personal balance sheet contain numerical data like your salary or how much money you are spending on grocery expenses every month. However, such information is indirectly represented by changes in the net worth figures.
Net worth is simply the numerical figure you get when you take all of your assets, and minus all of your liabilities. Assets can be defined as everything you own that has value and can be expressed in terms of price or current market value. Liabilities can be defined as everything that you owe, including debt and payment obligations to another.
To calculate your net worth and determine the status of your current financial condition, you'll need to add up all of your debt and liabilities into a single numerical number, and then subtract that from the total combined value of all the assets and financial accounts you possess.
1) Assets (Add Up All Of Your Cash Savings, Investments, and Fixed Assets) - The asset category is made up of the total amount you have in your bank accounts like checking and savings, the fund balances stored in your investment brokerage accounts, and the total value of your fixed assets which encompasses the fair market value of properties like real estate and vehicles. In general, your assets are made up of all your personal possessions and financial accounts that can be converted into monetary form in the event of a total liquidation sell off. It's the total amount of money you could get if you pulled all of your money out of savings and sold off everything including your house and real estate properties for cash. To help you add them up, here is a basic breakdown guide:
- Step 1: Add up the value of your liquid assets (cash and bank accounts). Liquid current assets include cash, bank account deposits, checking accounts, savings accounts, money market accounts, Treasury Bills or T-Bills, and also the cash value of certain life insurance plans. These types of assets generally have the same value as cash as they are readily usable as cash or can be readily converted into usable cash form in a very short period of time. For example, the funds you have saved up in your online savings bank or stashed in your high interest savings account are both considered liquid assets as they are easily converted into usable cash form with a quick trip to the bank or ATM. Also, certain life insurance plans such as whole life and universal life insurance policies are regarded as liquid assets as well due to their convertible cash value, unlike term life insurance policies which have no cash value. Remember, we're talking about the cash value of your life insurance policy, not the amount that would be paid out if you were to collect on the policy.
- Step 2: Add up the value of your investment assets (stocks and bonds). Investment assets tend to be less convertible into cash upon demand but nevertheless still make up your total asset count as they can be converted into cash within a reasonable period of time. Investment assets include certificate of deposits (CDs), stocks and bonds, mutual funds, and retirement accounts (401K, IRA, Roth IRA).
- Step 3: Add up the value of your fixed assets and personal possessions (real estate and vehicle). Fixed assets include the fair market value of the houses, condominium properties, and vehicles that you own. They also cover the market value of any other significant possessions including valuable artwork, expensive jewelry, or priceless household furniture. The actual decision of incorporating fixed assets into one's financial net worth calculation is somewhat controversial as opponents argue that such assets are not appraised consistently and are not easily sold upon demand. Detractors to using the fair market value of real estate for example argue that incorporating home values frequently offer up an unrealistic and skewed valuation of true net worth. Particularly during a major real estate slump, homes are not always easily marketable and sold. Supporters obviously argue that incorporating home values into net worth calculations is important because home equity (the difference between the current market value of your home and the current balance of your mortgage) indeed has value as it can be converted into cash upon an earnest home sale and borrowed against during a time of need. For many, the fair market value of their primary residence comprises the bulk of their positive net worth and thus it would seem incomplete to not incorporate it into net worth calculation somehow. While I personally only add real estate and vehicle value into my calculation of net worth, disregarding the market values of other personal possessions like clothing and home electronics, I think the key is just to be consistent in what you include and what you leave out. It's also particularly important to be very realistic when assessing fair market value, especially when it comes to home pricing. It's probably best to under-estimate than to over-estimate the value of such fixed assets. You definitely do not want to give yourself the inaccurate illusion of being house rich with no other significant liquid assets to speak of. You'd only be fooling yourself.
2) Liabilities (Add Up All Of Your Personal Liabilities and Debt). Liabilities include any money that you owe from loans, or debt obligations you may have including credit card balances, car loans, home mortgages, home equity loans, lease obligations, student loans, personal debt obligations, and court mandated alimony or child support payments. Liabilities, whether current short term debt obligations like credit card debt, or long term liabilities like home mortgages and auto loans, must be added up and subtracted from the total asset number to come up with the complete net worth figure.
After you have added up the value of your total assets, take that number and subtract away the total value of all your liabilities to come up with your calculated total net worth. This will be the current snapshot status of your financial net worth number at this point in time. Whether you incorporate certain assets and liabilities into the calculation or leave certain factors out like personal possessions is not important. How you go about the details of tracking your financial networth is up to you - just be consistent from month to month. The ability to track your financial progress in a uniform way on a periodic basis is the most important factor.
Track Your Net Worth Using Online Account Aggregation Tools and Net Worth Calculators
For those not certain on how to go about tracking their financial net worth from month to month, I recommend using an online tool like NetworthIQ. While NetworthIQ's progress charts are quite ugly (for the lack of a better word), the site's a pretty popular choice among personal finance bloggers and those who want a simple networth tracking tool that is easy and a no-brainer to use. Just go create a NetworthIQ account and start posting monthly net worth asset and liability updates to get started. To keep actual tabs on the many bank, credit, and investment accounts you have in your financial portfolio, I suggest using an online tool like Yodlee. Yodlee is an online account aggregator service that powers the online account consolidation tools of popular financial institutions like Fidelity Investments (Full View), Bank of America (My Portfolio), and HSBC (Easy View). I personally use Yodlee powered tools through my brokerage at Fidelity and my bank account at Bank of America to help me track all of my account balances from one easy to view location.
Despite the disagreements on what ought to be and what ought not to be included into the calculation of net worth, don't let that discourage you from attempting to track your own financial progress using your own preferred method. Questions such as whether married couples should keep their finances separate or combined for net worth calculation, and controversial issues arising from the inclusion of home equity or the value of one's small business (like a blog business) into net worth calculation should not dissuade you from learning to track your personal financial progression. While I personally would include the total joint account balances for married couples into net worth, and personally would not include the market valuation of my home business into net worth calculation, to each his own. The key is just to be consistent so you can evaluate and chart your own personal financial growth from month to month. The goal is to give yourself the confidence and motivation to make the right changes and course corrections in your financial walk to help you achieve your long term financial goals.
Compare Your Net Worth To Others In Similar Situations
|The purpose of comparing your own regularly calculated net worth figure with that of others is to see whether you are on the right track. Keep in mind that net worth figures may vary significantly among different people as our personal lives are greatly affected by our varying stages in life. For example, married couples will almost inevitably have higher combined net worth numbers than single unmarried individuals of the same age. Those with employer sponsored 401K plans will also tend to have higher asset numbers due to favorable tax deferred matching plans. Home owners will also tend to have higher, and possibly skewed asset valuations due to different home appraisal sources.||
Net worth valuations may also vary greatly depending on the make up of one's assets and liabilities. In general, assets comprised solely of liquid accounts and investments such as cash, bank account funds, and stock market investments tend to paint a more standardized and accurate picture of financial net worth. It's when you get into vehicle and real estate valuations that the calculation of net worth gets a bit personalized and inconsistent for comparison purposes. Home valuation in particular is a tricky art and is not always entirely accurate and is highly dependent on who's doing the appraising and the standard being used. Furthermore, just because a home is appraised at a certain price does not necessarily mean it can be sold at that high price. In a tough housing market, home buyers frequently demand closing prices well below supposed fair market value. Keep that in mind as you compare your own financial net worth with that of others. Remember that net worth calculations and standards are not always uniformly applied from person to person, and that net worth is highly relative. For example, a net worth of $100,000 for someone living in an expensive area like northern California or downtown New York City may not be as big of a deal as it would be for someone living in a cheaper state like Nebraska or West Virginia.
Other than using Net Worth IQ to track your financial net worth progression, you might also be interested in using the tool to run searches for the publicly available net worth profiles of others. For the sneaky voyeur in all of us, it's an interesting way to view the financial health of those in similarly situated categories like age, income, occupation, education, country, and state. If you are dying to know - here's my own publicly available Networth Profile.
Another good net worth comparison source is CNN's Millionaires In The Making site where CNN regularly profiles singles and couples, documenting their individual stories to become a millionaire. The Millionaires In The Making site not only provides lots of great anecdotal financial planning tips, but it also provides the actual net worth breakdowns of all the individuals and families profiled. You might also want to try out CNN Money's Net Worth Calculator tool, which ranks you according to how you stack up based on age and income. I'm not sure how accurate the tool really is and suspect the methodology is a bit off. However, it's still an interesting comparison tool at your disposal. Just use it with a grain of salt.