How much are you worth? If you sold everything you owned right now and paid off all your debts, would you have any money left over? How much? This number is called your “net worth”. If you OWN more than you OWE, you have a positive net worth. If you OWN less than you OWE, you have a negative net worth. If your goals in life include retiring, funding higher education, starting a business, charitable giving, or any number of other cash-intensive projects, you’ll want your net worth to be in positive territory, and growing each month. Calculating your net worth each month can be extremely useful, telling you whether or not you are on track – and it can also be fun.
Things you own are called “assets”. Assets can be in any shape or form, such as: cars, homes, cash, jewelry, bank accounts, investments, or priceless works of art. Basically, if you can sell it, it’s an asset. Make a list of all your assets and what each one is worth, and then add them all up. If you’re just starting out, you might not have a lot of the things I just listed, so feel free to include things like stereos or textbooks – as long as they could be sold. This is how much you own. Ideally, you want this number to be large and getting larger.
Things you owe are called “liabilities”. Liabilities also come in many shapes, but all of them represent money that is going to come out of your pocket: mortgages, auto loans, student loans, and credit card balances. Make a list of all your liabilities and how much you owe on each one, and add them up. This is how much you owe. Ideally, you want this number to be small and getting smaller.
When you subtract your total liabilities from your total assets and figure out how much you’re worth, don’t be too upset if your net worth is smaller than you’d like. This is just the base number. If you do the calculation again next month, and the number is larger than it was last month, congratulations! You’re making progress. Knowing that you’re going to be calculating net worth again next month may also help you make purchasing decisions at the store. If you don’t buy the item, the money you didn’t spend will stay in your bank account, and will add to your asset total next month.
Figuring out your net worth can be a big help. Email me if you’d like to see a spreadsheet I put together for this purpose.
This post originally appeared in the March 5, 2008, edition of the Greenhorn Valley View.