On of the best ways to figure out the state of your financial health is to calculate your net worth. Not only is this figure important for your own personal knowledge, but determining your net worth is important in order to qualify for a variety of financial products such as loans and investments. Fortunately, calculating it isn’t too hard, but it is important to start with accurate information in order to get a good result.
In order to calculate this figure, gather together any documents pertaining to your investments, bank accounts, credit lines and loans. Then, on a piece of paper or spreadsheet, make two columns. In the first column, list every asset that you own. Assets are any property with value to another person. They typically include savings and checking accounts, cash on hand, stocks, bonds, and mutual funds, and investment accounts. Most people also choose to include their retirement accounts, even though they would prefer not to liquidate these accounts immediately. In the asset column, you may also consider including “soft” assets such as real estate and cars. Soft assets can be difficult to determine the actual value of because objects such as jewelry and antiques must be appraised by a professional. Soft assets also have a tendency to change in value less predictably than hard assets such as cash. Because of this, some people choose to leave these types of assets out of their net worth calculation, while other people choose to use the smallest assessed value of these objects in their calculation.
In the other column, list all of your liabilities. Be sure to include any debts, including mortgages, car loans, credit card balances, past due taxes, and pay day loans. Do not include recurring bills that are not tied to loans, such as electric or insurance bills. Although these are expenses that you can expect to have to pay, they are hard to predict and therefore usually not included in the calculation of net worth. Also, be sure to subtract any future liabilities, such as balloon payments on loans or delayed tax bills. For a true net worth calculation, use the principal balance on each of the loans, rather than the total amount that would be paid after interest is added. Net worth is only a snap shot of your present financial situation, so only use the amount that would need to paid today in order to pay off the loan.
Once the assets and liabilities in each category have been listed, total them, then subtract the liabilities from the assets. A positive result means that you have a positive net worth, while a negative result means you have a negative net worth. If the result is negative, it isn’t necessarily a bad thing. Plenty of people who are starting out have negative net worths. It is also very common for people who have just acquired a large asset via a loan to have a negative net worth. As long as you have the income to cover the payments and the asset is not losing value, it isn’t a bad thing. The important thing to remember is that net worth only shows a small part of your financial picture.