This is post #1 from the 30 Day Personal Finance Challenge: Boost Your Financial Health with a Daily Tip!
It first occurred to me to calculate my net worth while reading Harv Eker’s book: Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth.
Rich people focus on their net worth. Poor people focus on their income. – Harv Eker
In a nutshell, your net worth is everything you own of significance (your assets) minus what you owe in debts (your liabilities). If today, right here and right now you drew the line, sold all your possessions and paid all your debts, net worth is what you’d be left with.
Why it’s important to track your net worth
Net worth is a real eye opener. It shows you clearly if you have been building your wealth or you have been wasting your money mindlessly. It shows the consequences of your financial decisions. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by unexpected expenses or a substantial decrease in asset values relative to liabilities.
Net worth can be tracked and it’s objective. That’s exactly what I needed as a tool to measure the progress on my financial independence goal.
How to calculate your net worth
First, calculate your assets and your liabilities.
Assets (what you own)
Cash & Liquid Assets
- Cash and bank accounts (the current total balance of your checking and savings accounts)
- Money owed to you
- Other (any other assets of value)
Investment assets (marketable)
- Individual stocks
- Mutual funds – a professionally managed collection of stocks and/or bonds
- Bonds (treasury, municipal or commercial bonds) – a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest
- Annuities – a contractual financial product sold by financial institutions designed to accept and grow funds from an individual and then, pay out a stream of payments to the individual at a later point in time
- Business interests
- Retirement accounts (the current balance of your retirement accounts)
- Cash value of life insurance (some life insurances have a cash value)
Real estate (use the actual market value)
- Primary residence (home)
- Other real estates (vacation property, second home)
- Real estate investments
- Vehicles (the total value of all automobiles that you own, don’t include any leased vehicles)
- Collectibles (art/antiques, stamps, coins, jewelry, gems or precious metals such as gold)
- Household items (the value of your household goods and items such as furniture, home electronics, silverware, etc.)
Liabilities/Debts (what you owe)
- Car loans (total amount you currently have outstanding on your auto loans)
- Student loans (total amount that you currently owe in college or student loans)
- Credit card debt
- Line of credit/overdraft
- Unpaid bills
- Taxes (income tax or property tax owing)
- Other (charitable pledges, family obligations, etc.)
- Home mortgage(s) (the current principal balance remaining on your mortgage. This is the amount that you would have to pay to own your home free and clear)
- Home-equity loan
Then follow the simple formula:
NET WORTH = TOTAL ASSETS - TOTAL LIABILITIES
What is the next step
Over time your net worth will change as your assets earn interest or are depleted and your liabilities increase or decrease. Calculate your net worth periodically. I would recommend every 90days. Use a simple chart to track the progress.
What you focus on expands.
This simple step is enough to give awareness of where you stand financially and to help you get going to where you want to be. Every financial move you make should be aimed at increasing your net worth. This means either increasing assets or decreasing liabilities.