If you are ready to get your finances in order, the first thing you need to do is give yourself a financial reality check. And the first step in doing so is to calculate your net worth. Understanding your net worth is crucial if your goal is to achieve financial independence and increase your wealth.
The simplest way to explain net worth is by describing it as how much money you would have leftover if you sold everything you had of value to repay all of your debt. Meaning if every bill collector, loan shark and bank lender said today you have to repay back everything you owe and you went scrounging for every dollar you had in the bank, old 401Ks from long forgotten jobs, under your mattress, etc. to repay them, what do you have leftover. The technical formula for net worth is assets minus liabilities = net worth.
So what are assets?
Technically, everything you own that can be sold can be considered an asset. But realistically you only want to include items of significant value. Here are examples of assets:
Investment accounts – stocks, bonds, mutual bonds
Retirement accounts – 401K, 403B, Pension plans
Equity in your home
Equity in car
Other real estate investments
And what are liabilities?
Simple put, anything you owe. Here are examples of liabilities:
Credit card debt
In order to calculate your net worth, you may have to do some research into all of your old asset accounts. Many people I worked with have old 401Ks and 403Bs sitting at in accounts collecting dust but not interest. You need to find those accounts and their current balances. At some point they need to be rollovered, but baby steps. For now find the balances. Add that to the amounts in your savings account, the value of your home, investment accounts and the selling price to a car comparable to yours.
Next you will need to add up all of your debt. This may be a bit easier because bill collectors tend to know where you are at all times.
Now what’s the difference? Does the number surprise you. Well now that you know what it is, you can take the first steps to improving it. They say knowledge is power, and now that you have the knowledge you have the power to change it.
I have created a simple excel Net Worth calculator. It lists items typically found in an individuals Net Worth to take the guess work out of deciding what needs to be included.
If you want to try out my Net Worth calculator, click on this link or head directly to the budget tools section of my site.