Your net worth is simply what you own after subtracting
what you owe. It's just basic math, but understanding
your net worth is a critical first-step to checking
to see if you're realizing your financial goals. Figuring
out your new worth is really quite simple: just add
up your assets and subtract your liabilities. Our online
worksheet can help you create a personal balance sheet
Getting on Track
Most Americans don't know their net worth, but it's
a great way to look at how many years worth of spending
habits affect financial health. Jennifer, a young professional
living in San Francisco, figured out her net worth and
found that she had too much credit card debt and too
much money languishing in a low-interest savings account.
It inspired her to pay cash for a new computer she really
needed--a computer she was planning to put on her credit
card because it seemed so expensive. Her new computer
is now a real asset rather than a liability she might
have spent years slowly paying for.
The Importance of Net Worth
Whether you're making big purchase plans or saving
for your retirement, your net worth is crucial information.
- Getting a grasp on your real net worth is the first
step in reorganizing and rebuilding your finances.
If you are in debt, the important thing is to turn
it around and start saving.
- Before you can reach a financial goal, you need
to know where you stand now. Your net worth is a reference
point on your financial road map. Once you know your
net worth, you can set a budget to reach your goals.
- You'll be better able to protect your assets. Determining
the worth of your valuables is not only necessary
to figure your net worth, it also helps you get the
proper insurance coverage.
On the Plus Side
Things in the "plus" column are your assets. For instance:
- 401(k)s, IRAs and pensions
- Stocks, bonds and mutual funds
- Cash value of life insurance
Do not include a future inheritance; you can't count
on it. The same goes for future paychecks. You only
want to tally assets and debts you have right now.
Your home is probably your biggest asset and your mortgage
your biggest liability. Be sure to get an accurate idea
of what it's really worth by seeing what homes are selling
for in your area. If you want to be really accurate,
subtract seven percent from the price you think your
home is worth today for a broker's commission and other
costs of sale.
On the Minus Side
Now, here are things that go in your "minus" column:
- Car loan
- Home mortgage
- Student loans
- IRS debt
- Credit card debt
Credit card debt is often overlooked, but it is every
bit as real as a home loan and can be more dangerous
to your financial health if you carry large balances
from month to month.
If you find you're spending more than you're earning,
make an action plan to control expenses and increase
investments. Keeping more of what you make is the key
to increasing your net worth.