Calculating your Net Worth

I’ve helped quite a few people get a handle on their finances. It can be a big job. But the starting place is always the same: calculate your net worth. What is your net worth? It’s what you have minus what you owe. Why do you start with your net worth? Because you want it to go up, and the only way to tell if it’s going up is to keep track of it.

Whether you’re in debt and trying to get out, doing ok but want to know if you’ll be able to retire, or just starting out on your own, knowing your net worth and being able to easily keep it up to date is essential to understanding your finances. And it’s easier than you think.

What you Have: Your Assets

First, tally up what you own:

  1. Bank Accounts. There are two ways to go about this. The easier way is to note the ending balance on the latest statement for each checking and savings account you have. The downside of this method is that it does not reflect checks you’ve written that have not yet cleared, so will overstate your balance somewhat. If you keep your checkbook and savings account records up to date, you can instead note the actual balance, including all checks that have not yet cleared. Whichever method you pick, stick with it. Switching back and forth will be less accurate than using the statement balance.
  2. Retirement Accounts. Identify all the retirement accounts you have: personal IRAs, 401(k) and 403(b) plans, defined benefit pension plans, and the like. This is often the hardest part of toting up assets, because many people lose track of plans they’ve participated in with past employers. Once you’ve identified them all, gather the latest statement for each and note the balance. For pension plans, note the cash equivalent amount. You may only get such information once a year. That’s ok; just use the latest information you have.
  3. Investment Accounts. Find the latest statement for each non-retirement investment account you have and note the ending balance. Such accounts include brokerage accounts, mutual funds, and money market funds.
  4. Physical Assets. Physical assets are things you can touch or hold. If you own a house or other real estate, determine as best you can how much you could sell it for. Don’t try to calculate the equity (that is, the difference between the house’s worth and how much you owe on the mortgage). Put the entire value in here; the entire mortgage balance will be added to the list of debts. Most other physical assets do not go in the net worth chart. For example, do not include your car or other expensive items unless they are truly collectable. Even then, be sure to use the resale value. Be conservative in your estimates. Many collectors are shocked when they realize they can only get a small fraction of what they paid when selling a collectible.
  5. Cash. I don’t include cash in my list of assets. If you keep cash on hand for emergencies, separate from the cash you use for day-to-day purchases, you should count it. Otherwise, don’t bother.
  6. Other Investments. If you own your own business, or part of someone else’s business, that is not traded on a stock exchange, assigning a value is very tricky. Err on the side of underestimating the worth of such investments.
  7. Debt Owed to You. If someone owes you money, that’s an asset – but only if you reasonably expect it to be repaid.

What you Owe: Your Debts

This is the not-so-fun part of the process. Many people put off financial planning because they do not want to see a list of all their debts in one place. If your stomach feels like it’s in a knot just thinking about it, take a few deep breaths. The uncertainty is usually worse than the actual knowledge.

Start by jotting down all the different debts you have.

  1. Home Loans. Home loans include mortgages, home equity loans, and home equity lines of credit, but do not include rent. For each loan of this type, find the outstanding balance. For mortgages, this may be called the “payoff amount.” If it’s not included on your latest statement, it may be available online or by calling customer service.
  2. Car Loans. Include not just loans used to purchase a car, but also any loans you may have taken out and secured with your car (often called “title loans”). Find the current balance or payoff amount for each one.
  3. Consumer Debt. Find the most recent bill for each credit card you have and make a note of the total balance owed. Use the number next to “New Balance” or “Ending Balance” on the statement. Do the same for any other consumer loans you may have taken out, such as furniture purchased on an installment plan. If you have a credit card that you pay in full every month, you should not include it in the list of debts.
  4. Student Loans. Again, find the remaining balance or payoff amount for each student loan. Include all such loans, whether they are in deferment or not.
  5. Other Debt. If you owe any other money to anyone, include the total amount owed.

Putting it all Together

The best way to organize all this information is in a spreadsheet. I use Excel, but there are free alternatives available such as Google Docs. If you’re not familiar with spreadsheets, this is a good tutorial. To set up your spreadsheet:

  1. In the second column of the top row (typically called cell B1), type the date you are calculating your net worth as of. I find it easiest to use the first or last day of the month. The ending dates of your statements will probably be different from each other. That’s ok – just use the last statement on or before the date you choose.
  2. In A2 (first column, second row), type the word “Assets”. In A3 list the name of your first asset. Use a name you’ll recognize, such as “Checking Account”. If you have more than one checking account, add the name of the bank. Continue to list your assets in column A. In column B, fill in the balance for each asset. At the bottom of the list of assets, add a formula to sum the assets. In Excel, you can do this by selecting the first blank cell after the list of balances and clicking the button labeled Σ.
  3. Skip down a couple rows and add a label “Debts” in column A. List the names of your debts below that label in column A and add the balances in column B. Add a formula to sum the debts.
  4. Skip down a couple more rows and add a label “Net Worth” in column A. In column B, next to that label, add a formula to subtract the sum of the debts from the sum of the assets. In Excel, the formula would look like: “=B8-B16” (don’t type the quotation marks), where B8 is the cell that contains the sum of the assets, and B16 is the cell that contains the sum of the debts. Once you enter that formula, you’ll see your net worth.

Sample Spreadsheet

Here’s a sample I made using Google Docs containing the December 2010 numbers for a hypothetical couple, Alice and Bill:

You’ll notice I added a bit of formatting; the tutorial I linked above can tell you how to do this if you want. You’ll also notice there are three labels I haven’t mentioned yet, all containing “Net Change”. These rows will be used to calculate the change from month to month. But before the calculations can be added, you’ll have to add another month’s worth of numbers.

One Month Later: Tracking Net Worth Over Time

Each month, you’ll add a column containing the new balances. You should obtain these balances in the same way you obtained the original balances: by looking at the latest statements for each asset or debt and obtaining the current balance or payoff amount, as applicable. You can’t simply subtract the payments you made during the month from the old balances to calculate the new balances. It’s a sad fact that loan balances do not go down by the same amount you pay each month, because a portion of each payment (sometimes most of each payment) is used to pay interest.

Here’s Alice and Bill’s spreadsheet for January:

The new column is essentially identical to the first column of balances: two lists of numbers, each with a sum at the bottom, and a cell showing the first total minus the second total. The key difference is that each “Net Change” row has a formula in it in the new column. This formula is January’s total assets minus December’s total assets, January’s total debts minus December’s total debts, and January’s net worth minus December’s net worth. The formula would look something like “=C8-B8” for the assets, “=C16-B16” for the debts, etc.

If you add a new asset or debt during a month, insert a new row and add in the new balance. Be sure to check your formulas to be sure the new item is included in the sum. If you remove an asset or debt, leave the row intact but enter 0 for the amount going forward.

You should reevaluate the worth of assets that don’t have precise balances, such as your house, once a year. There’s so much guesswork involved that there’s no point in doing it more often.

Here’s what a year’s worth of data would like for Alice and Bill (use the scrollbar at the bottom to view the rest of the data):

In December 2010, Alice and Bill’s net worth was negative $22,000 – they owed $22,000 more than they owned. By November 2011, their net worth was negative $11,000. Less important than the actual numbers is the trend in those numbers over time:

Graph of Alice and Bill's Net Worth

This graph shows the power of the net worth chart. First, it’s a potent reminder that paying off debt increases your net worth: in the long term, it’s the same as saving. Second, the graph allows you to see a year’s worth of data in an instant so you can focus on trends rather than temporary swings. Third, it lets you focus on where you’re headed: if you are in debt and feeling discouraged, hide the dollar amounts on the left axis to be reassured that you’re moving in the right direction.

Financial planning is about making sure that line goes up, not down, over time. There are times when it won’t – during the latter stages of retirement, possibly; during school, probably. And there will be many individual months where it goes down, such as when making a big purchase you’ve been saving for or when you have to live off savings during times of unemployment. But in general, the line should go up during your income-earning years.

Much of this series will be about helping you want to make decisions that send the line up. By keeping a regular eye on your net worth, you will be able to see the long-term effect of your financial decisions. I’ve found that this not only helps people save, but also helps people spend money with less guilt and more satisfaction.

The net worth chart is a series of snapshots in time. The next step will be to examine what goes on between each of the columns in the chart by tracking cash flow.

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