Net Worth. The sum of all things that's yours; good and bad. Calculating this number can be scary. But just like the Credit Report, its just a point in time.
Net worth is a tool we use to see where we are today compared to this time last year (or if you are like me, last month). There is no right or wrong to how many times you calculate net worth. If you have a Personal Capital account, you could literally calculate your net worth daily. FULL DISCLOUSURE: Its the last thing I do before I go to sleep, check my personal capital account.
Net worth is also used to project where we want to be next year. So, how do we properly calculate net worth.
Net Worth = Assets - Liabilities
Sounds simple enough. What makes up “assets” and “liabilities” is where we get hung up. Really, the most important thing to remember is to be consistent and honest (with yourself).
What is an asset? An asset is defined as property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.
Lets think about that in terms of all that is yours; real estate, stocks, bonds, mutual funds, retirement accounts, side business, book, etc…
Pause here and make your list of assets. I'll wait. (insert break with music, coffee and pie)
Times up. OK, what's on your list? Did you list the home you live in? How about your car?
The first time I calculated my net worth I added both. It was purely for psychological reasons. My net worth was so low that without it, in 2009, it came out to NEGATIVE $150,000. My mind could not get around that number. I mean, its one thing to run up credit card debt because the holiday shopping got out of hand, its quite another to wake up one day and come to grips with NEGATIVE $150,000. I mean, holy smokes, when did that happen!!??!!
However, if you ask Robert Kiyosaki, author of the famed Rich Dad, Poor Dad, he would tell you, “Your home is not an asset.”
WHAT??? Blasphemy! I remember thinking, “how can something so expensive not be listed under assets? I put my 20% down… isn't that instant equity?” Its not, for the simple reason that 1) you need someplace to live and 2) if you carry a mortgage, the bank actually owns your house. What you own is the debt (home loan).
Asset Lesson: when listing your assets, the rule of thumb is no home and no car. Cars depreciate and are needed.
What is a liability? Liabilities on the other hand include all things you owe money on including your home loan and car loan. Liabilities are also medical debt, school loans, personal loans (which I HIGHLY recommend against), IOU's, etc…
Some debt is good (think tax deductible) and some is bad (think noose around your neck).
Summary: In truth most people do not include their home or car. But, calculating net worth is more “cooking” than “baking” meaning more by your taste and less about following directions. So long as you are consistent, that is most important. Calculate your net worth annually (at a minimum) to track how far you have gone. (Its a great feeling to see where you started and where you are 5-, 10- years down the road.)
How are you going to calculate your net worth? As your net worth gets better, will you go back and adjust?