Say you have a destination in mind. And, as luck would have it, you also happen to have the best map in the world right there in the palm of your hand. Unfortunately, without also knowing your starting point, you can’t get where you want to go. Financial planning works exactly the same way.
You need to start at “ground zero” – with your current net worth – before you can chart a viable course toward meeting your financial goals. Take a few moments now to find out how you can calculate your net worth.
What is net worth?
Your net worth is the total value of everything you own reduced by any outstanding liabilities. Or, to put it another way, net worth is the difference between what you own and what you owe.
How do I calculate it?
To calculate your net worth, add up the market value of all your assets. List what you have in your savings and checking accounts and don’t forget to include certificates of deposit (CDs). Also, if you have a bank safe-deposit box that you haven’t opened in years, now is the time to take an inventory of the contents. You may find hidden sources of cash in savings bonds, life insurance policies, corporate bonds, stock certificates, and other documents you put away for safekeeping.
If you own a house, list its current market value, referring to prevailing sales figures in your neighborhood as a guideline. Include the value of your car, the cash surrender value of life insurance policies, personal property such as jewelry, artwork, antiques, and collectibles.
Estimate the total market value of your securities and investments as of the date the balance sheet is compiled. Include stocks and bonds, as well as mutual-fund shares, Treasury issues, and money-market investments. Refer to the newspaper or check with your banker and stockbroker to help you assess the current market value. If you have IRAs and other retirement plans, be sure to add in the cash value of each account.
Pension funds also should be included in your list of assets, but only if they have a present value. If you are not yet vested and the funds have no current measurable worth, you should not view them as assets. The same is true of any other resource that you can access only by satisfying certain requirements, such as working a minimum number of years at one firm or reaching a specified age.
After you determine the total value of your assets, total your liabilities. At the top of the list for most families is money owed on their mortgage. Other common liabilities are outstanding home equity loans, student loans, car loans, credit card balances, furniture or other items being paid on installment, and taxes owed. Also, be sure to include balances owed to doctors, dentists, and other professionals.
Now, subtract total liabilities from total assets. The resulting number is your net worth, a baseline from which to measure your financial well-being going forward.
Now you can take charge
By itself, a net worth statement is a way to take the “pulse” of your financial standing at one particular point in time. But don’t underestimate the importance of this measurement – it’s a benchmark against which all future readings will be evaluated, a means of putting your finger on the health of your financial progress. In other words, if you are striving to reduce consumer debt and accumulate assets, a semi-annual or annual net-worth checkup will provide you with a concrete and measurable account of how close, or how far, you are to obtaining your goal.
If your net worth this year turns out to be negative, don’t despair. A net worth in the red doesn’t mean that disaster is a heartbeat away. Instead, it simply means some belt-tightening and sound financial planning may be in order. Again, rather than panicking, focus on the valuable information you’ve just gained; knowing what’s “broken” not only allows you to fix it, but the insights you’ve picked up along the way will help ensure that this situation won’t ever happen again. Certified public accountants recommend you make an annual ritual out of refiguring your net worth. Not only will it be gratifying to see your financial picture improve, but the resulting knowledge can help you budget, devise an investment strategy, and even plan for retirement.
Prepared by the Nevada Society of Certified Public Accountants.