An acquaintance of mine formerly owned a store that sells “country” products like hand-crafted wood furniture, candles, and decor inspired by rural living. Twice a year, she recruited family members and friends to help take an inventory of the entire store. This process involved many hours of walking throughout the building and counting items on shelves and in storage. Even though the computer sales system tracked the quantities of items so at any time she could identify the number of wool welcome rugs with a turkey design, someone would count the rugs on the shelves to ensure the computer was correct.
Like a store, your awareness isn’t complete until you do your own financial inventory. Just like your name or your occupation identifies yourself quickly to other people, your net worth — the sum of the values of all your financial accounts — is a nominal description of your financial identity. The complete calculation of a net worth can be convoluted because there are some important items to include that aren’t easily valued, so we can start with the most important aspects. For our purposes, we will look at the simplest way to determine your net worth.
Everything we need to consider fits within these six categories:
- Bank accounts: where are they and what are the balances?
- Investments: Do you have any? If so, what is the current estimated value of what you own?
- Property: Do you own a house? How much did you buy it for or how much do you think it’s worth now?
- Mortgage: Are you paying off your house? How much left do you owe?
- Other loans: Are there any other loans that require your attention?
- Credit cards: If you have credit cards and don’t pay the balances in full each month, what are the balances?
If you enjoy working on the computer, list all of your accounts in each category into a spreadsheet program like Excel, Google Docs, or the free OpenOffice.org. Spreadsheet software isn’t difficult to use for the purpose of creating these lists, but if you would prefer to work with paper and a calculator, that is a valid choice.
Each row should represent an account or item. For each item, the first column should include the location or type of account and the second column should contain the amount or value. For accounts in categories one through three, enter the values as positive numbers. For accounts in categories four through six, use negative numbers to represent the values.
Add up the numbers in the second column and enter the total beneath. This total, for the purpose of this early stage of financial development, is your “net worth.” Your net worth is just a calculation of what you own subtracted by what you owe at any one point in time. Just like your name or your occupation identifies you, your net worth describes your identity in financial terms.
If you are married or share finances with another individual, you may want to consider the financial accounts belonging to everyone within the household rather than just your own. Whether to do so is a personal choice.
Here is an example net worth calculation in its most basic form. If you’d like to go beyond the basics, read How to Calculate Your Net Worth. In the report below, the red numbers in parentheses are negative numbers, representing amounts you owe to other people or companies.
While your bottom line is a very personal number, don’t take it too personally if you feel unsatisfied. There are often quoted guidelines that describe what your net worth “should” be for your age, but that type of comparison neglects to consider situations which might be unique to your situation. For example, if you’ve spent more time earning undergraduate and graduate degrees before entering the workforce, your net worth may be lower than average once you begin working full-time, but may increase faster if your degrees provided you with opportunities for higher-earning jobs. (Please note that I wrote “higher-earning,” not “better.”)
Resist the temptation to compare your net worth with those of others. Although websites like NetworthIQ exist to make interesting comparisons within and across demographic groups, focusing on other people’s numbers is distracting when all you want to do is control your own finances. Use this number, your net worth, to understand your current position and determine whether it is where you would like to be.
Now that you know where you are financially, you need to look at some more numbers to get a quick feel for how fast your net worth is likely to increase (or decrease). The next part of taking control of your finances is making an accurate prediction based on your income and expenses.
Image source: jenn_jenn
Updated January 16, 2010 and originally published November 11, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.