How Much are you Worth? calculating your net worth

Calculating your net worth gives you a yard stick to measure your financial health, and is a means of tracking your financial progress.

Your statement of net worth is similar to a financial balance sheet, it shows your assets and your liabilities, and their net value. Formal accounting principles are easily applied to personal finance and are really useful in managing your money. Don’t be put off by this off though, calculating your net worth is really easy.

To use your statement of net worth, draw it up at the beginning of the year and then again at the end of the year and compare figures.

• Has your net worth increased or decreased?
• Has the value of your assets increased or decreased?
• Has the value of your liabilities increased or decreased?
• And for each of these questions ask yourself why? There may be good answers or bad.

Doing this exercise over the course of several years can be both enlightening and motivating. It’s nice to see progress on paper, especially when you don’t feel like you’re making much progress.

Calculating your net worth

Read through the step by step outline to calculating your net worth and check out the example below to get an idea of what it looks like.

1. Write down all of your assets – anything that you own (even if they are financed). Divide them up into personal assets and investment assets (see example below).
2. Estimate their value and jot this down. Try to be as accurate and realistic as possible. What would you really get for that asset if you sold it today?
3. Total the amounts.
4. Write down all your liabilities (debts). Divide these into personal and income producing liabilities.
5. Look at current banks statements to help you work out the amounts of all your liabilities.
6. Total your liabilities.
7. Deduct the total liability amount from the total asset amount.
8. The final figure is your net worth.

For an idea on what a statement of net worth looks like, check out the example below. I have tried to include as many categories as I could think of; you may have different assets and liabilities that aren’t included here. If a category doesn’t apply to you, leave it out.

Net Worth
Assets
Personal Assets
Cash at Bank	$1,000
Market Value of Home	$175,000
Cars	$7,500
Other Vehicles (Motorbike, boat etc.)
Household goods	$5,000
Jewellery and collectables
Superannuation / Retirement fund etc.	$35,000
Cash Value of Life Insurance
Total Personal Assets	$223,500
Investment Assets
Term Deposit	$5,000
High Interest Online Saver	$3,000
Shares / Bonds etc..
Managed Funds	$12,000
Rental Properties
Net Value of Own Business
Total Investment Assets	$20,000
Total Assets	$243,500
Liabilities
Personal Liabilities
Mortgage	$65,000
Car Loans	$4,600
Personal Loans
Credit Card balances owing	$1,850
Interest Free Loans	$2,600
HECS, HELP, Student Loans
Total Personal Liabilities	$74,050
Investment Liabilities
Margin Loans for Shares
Margin Loans for Managed funds	$6,000
Mortgages on Investment Properties
Total Investment Liabilities	$6,000
Total Liabilities	$80,050
Net Worth	$163,450

Notes

• On a traditional balance sheet, the standard way of dividing up your assets is into “current” assets which are liquid assets such as cash in the bank, shares etc; and “non-current” assets: assets that are not readily turned into cash, such as your home. The same applies for liabilities. I prefer the above method for calculating your personal net worth, because I want to be able to focus on those assets that build wealth – investment assets.
• When working out the market value of your home, be conservative, it’s better to undervalue than overvalue. Give your local real estate agent a call if you need help working out the value of your home.
• It’s easy to overestimate the worth of our cars and household goods. Unless you own antique jewellery or a rare collection of Elvis memorabilia, your personal possessions aren’t going to have much street value. Think if you had to sell your stereo, how much would it really fetch? Then halve that amount.
• It’s no secret that I love excel. If you are proficient with excel, then you can use formulas to link the balances in your statement of net worth such as your bank balances to your budget so that they update automatically. Alternatively, if you use a personal finance software package such as quicken, it will help build and analyse your statement of net worth.

Have you read these posts?

1. How Liquid Are You?
2. 5 techniques to a secure financial safety net
3. calculating your real hourly wage
4. Calculating Extra Loan Repayments in Excel Part 3
5. Generating Passive Income: An Overview