How to Determine Your Net Worth
In a global economy where information is as much a commodity as widgets or weed whackers, it pays to know what you're worth. While that goes for young and old alike, it's especially true for baby boomers, the oldest of whom turned fifty-four in 2000 and the youngest thirty-six.
That's where a personal balance sheet comes in handy.
A personal balance sheet gives you a blueprint for your financial life, one that you can work from again and again as you make lifetime
financial decisions (and you can also use it when you are working on your mutual fund portfolio). It's a fluid document that you'll need to revisit every six months or (at the outer limits) every year. In any event, you'll be glad you have it. Quantifying your financial goals is critical in the whole self-created portfolio process, and your personal balance forms the yardstick by which you can measure the success of your financial plan. As time marches on, you can tweak the strategy for your financial plan along the way to achieve your defined goals.
What else can a personal balance sheet do for you? It won't cut your cholesterol or give you dimples, but it can help you calculate your net worth.
Calculating your net worth is the first step in planning for your own mutual fund. A net worth calculation can serve as a financial planning wake-up call, especially when the end result is a low or even negative number.
Defining "Net Worth"
Simply stated, your net worth is the difference between your assets and liabilities. Typically, assets include t bank accounts, stocks, mutual funds, Individual Retirement Accounts or 401(k) plans, and other investments as well as the present value of a home, vacation home, car, and any other property that could be sold. You could also include money owed to you by others that you know you could receive and the value of your life insurance.
Liabilities are your debts and obligations. They should be divided into short-term debt (current bills, personal loans, credit card balances, etc.), and long-term debts (mortgages, other installment loans, etc.). You should also include any income taxes that would be owed, as well as any other obligations.
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When you take a crack at your balance sheet, remember to include only what you have now; don't fudge the numbers because you expect a pay raise or bonus. In technology terms those are "vaporware" items - revenues that may or may not appear depending on the whims of your boss, Alan Greenspan, or Dionne Warwick's psychic hot line for all you know. Those as yet unrealized dollars don't factor into your net worth until you turn that money into an asset.
To be most accurate, you will also want to get a ballpark estimate of the market value of your home (which hopefully has gone up since you purchased it) and your cars (where the value has depreciated or gone down) and other major property items. You might try to get a ballpark estimate on the worth of everything, from your wardrobe to your books, televisions, stereos, jewelry, and other major possessions.
Debts come next, so total up the outstanding amount you owe on the mortgage, student loans, car loans, credit cards, money borrowed from relatives, and so forth. Exclude monthly bills for things such as the telephone, grocers, rent, and the like; they factor into your cash flow and could be slowing down how much money you pump into increasing your net worth, but they are not part of a snapshot of your personal wealth.
Once you subtract the debt from your assets, you'll have an interesting number. If it's positive, this is the amount of money you would be worth if you paid off your debts today.
But what makes net worth most interesting is looking at it on a regular basis, seeing how much it has grown or shrunk over the previous year. Charting your progress on net worth is important because many people increase both their assets and liabilities at the same time. They put money away into the company retirement plan, for example, while financing new cars or increasing credit card debt.
They may feel "better off," but it might be a mirage. If your net worth statement churns out a negative number, it tells you how big a hole you would be in if you were forced to liquidate everything to pay off your debts.
While any time of year is a good time to check out your personal balance sheet, a year-end analysis may be your best bet. While you are popping the cork on a vintage bottle of bubbly and wondering if Dick Clark has a time machine stashed away that the rest of us don't know about, you can knock off several financial tasks at once. Think about it. Since you're going to have to start compiling income and other records to do your taxes, why not check in with your portfolio and see how Junior's college fund is doing or how much of a mortgage payment you have left?
