Before 2010 ends, calculate your net worth
Set the stage for a year of better money management by figuring out where you are right now.
I've always viewed the five weeks between Thanksgiving and New Year's as a time for reflection and setting the stage for a successful year to come.
This year, I thought I would fill the month of December with posts about the activities and preparations I undergo, both to put some closure on the current year and prepare for a better year to come.
First task: Calculate your net worth
There is no better snapshot of your financial health than your net worth. With one single number, you can get a glimpse of your financial state, good or bad. More importantly, by calculating your net worth on a consistent basis and comparing the numbers, you can get a sense of whether you're making positive financial progress or whether you're regressing.
Here's what you need to do:
Make a list of all of your assets and their values. How much do you have in all of your savings accounts? Your checking accounts? Your investment accounts? College savings? Retirement savings?
Some people also choose to include assets such as their automobiles and homes. I generally think automobiles should not be on the list because they're difficult to value properly and they're not readily liquidated, as most people need some form of transportation. It's up to you whether or not to list your primary residence's value. I don't.
The important thing is that you use a standard, so that when you calculate your net worth again, you'll be able to make a fair comparison.
Make a list of all debts and their balances. How much credit card debt do you have? What's your mortgage balance? What about auto loans? Personal debts?
As with the asset list, this may take some time as you locate the balances. Net worth calculations are a task that's greatly aided by personal-finance software like Quicken.
Add up the assets and the debts separately. Time to break out the spreadsheet or the calculator.
Take the total of your assets and subtract the total of your debts from it. The resulting number is your net worth.
- Bing: Net worth calculators
Ack! My net worth is negative!
Many people, particularly young professionals with a big pile of student loans, will find themselves with a negative net worth --something that seems really ominous.
I wouldn't worry too much about it, particularly if you're gainfully employed. Instead, I would focus on the month-to-month or quarter-to-quarter change in your net worth. If your net worth is going up on a consistent basis (meaning that negative number is getting smaller and smaller as it heads toward zero), then you know you're headed in the right direction.
How do I use this information? In my experience, the best use for net worth is to provide a yardstick and a motivator for better personal-finance behavior.
- First, you can raise your asset level by living more frugally and by finding new ways to earn income. If you resist spending, then the money stays in your account. If you earn more money, that money goes into your account. The better you are at either side of the coin, the higher your asset total will be and thus the higher your net worth will be.
- Second, you can reduce your debt level by living within your means and sticking to a debt repayment plan. These methods will reduce your debt load, thus increasing your net worth.
In other words, your net worth is directly related to your financial activity. If you make good moves, your net worth goes up. If you make bad moves, it goes down or is stagnant.
This is particularly noticeable when you start keeping track of your net worth over time, calculating it on, say, the first of each month and comparing it with earlier months. It's like keeping a financial score for yourself, one that, if you're competitive, will make you want to beat your earlier scores through good financial behavior.
I have calculated my net worth each month since 2006. For a while, I calculated it weekly and, for another period, I calculated it every two weeks. All of this data tells me a few things:
- Frugality really does pay huge dividends.
- Getting rid of debt accelerates your net worth growth because you're not dumping money on interest.
- My financial progress has been a very good thing.
I keep the numbers in a spreadsheet. You can use whatever documentation system works best for you.
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