There’s been a lot of talk lately about our high debt-to-income ratios and debt consolidation. Amid all that talk you’ll constantly hear how important it is to know exactly where you stand with your debt, and understand – to the penny – how much you owe. That’s true. If you’re ever going to pay off the rest of your debt, you first need to know how much that is that you’re paying off. But, there’s a flip side of that coin that’s not as often talked about; that’s determining your net worth. So how do you do it?
Determining your net worth is important because it gives you an overall picture of just how much you are actually worth. While you may have an idea of how many assets you actually own, people often become confused about what to add to their net worth, and what not to. To help you determine your net worth, here’s how to figure it out.
First, start by listing out all of your big assets. This would include things like a home or any vehicles. Many people start by including their yearly salary, but this isn’t actually part of your net worth. Because you don’t actually own that, it’s not actually considered to be an asset.
Once you have your biggest assets listed out, then add to that list your assets that have more liquidity to them, or are smaller assets. These might include things like cash, CDs, any bank accounts that have funds in them, investments, and retirement accounts.
Lastly, add to the list anything you own that is significant in value, but doesn’t fall into the other two categories. This could be things such as valuable jewelry, coin collections, computers, etc. Many people list things down to the clothes in their closets, but this isn’t necessary. The chances are that those things will depreciate in value very quickly. The rule of thumb for anything in this category is that anything listed should have a value of $500 or more.
Now, add the total amount of all your assets together and that is how much you actually own, in a dollar amount. Your next step is to list out all your liabilities.
These will include things like your mortgage, any HELOCs or other loans you have against the home, credit cards, loans, and any other debt.
Next just subtract your liabilities from your assets and there you have your net worth. You’ll now have a better picture of where you stand financially, and where you’re headed. Once you’ve determined your net worth, it’s best to go through the exercise regularly (about once a year,) and compare against the year before. This will allow you to actually utilize your net worth, and use it as a real tool when trying to get yourself in better financial shape.