Networth

May 19th, 2008 Dividend Pirate Posted in net worth |

I recently calculated my net worth and found it to be a very interesting and valuable exercise. So what exactly is Net worth?

Your net worth is essentially a grand total of all your assets minus your liabilities. It gives you a clear picture about where do you stand financially. Overtime your net worth should increase.

So why is it important to track your net worth? Below are my five reasons to track it,

Reality check: It gives you a reality check of where you stand financially (for better or for worse).

Goal setting: Once you know where you stand you can create a realistic goal and strive to achieve that. This is better than setting an arbitrary goal like becoming a millionaire one day.

Makes you money smart: Once you realize the simple fact that expenses decrease your net worth and income/investments increase your net worth you will start taking steps appropriately to increase your net worth. It is similar to checking your weight. It is psychological more than anything. Whenever I check my weight and I know it is more than I expected, I take better care in eating that day.

Easy: It is easy. Once you create a template, every month you have to just go in and enter values into the template. It should not take you more than 10 minutes.

Helps evaluate your financial decisions: If you track net worth over regular periods(months, quarters or years) it will give you a good idea about how your financial decisions are affecting your bottom line. I plan to track my net worth every month.

How do I track mine

I use a really simple excel sheet with some formulas. In the excel sheet,

I have an assets section which contains,

Cash: In the cash section I have all my checking and saving bank accounts.
Stocks: This includes the current value of the stocks that I hold in different brokerage accounts.
Retirement: This includes the money that we have in 401K and IRA.
Home: This is the amount that our house is valued at. I use zillow.com to track its current value. This also includes the value of other real estate investments.
Other assets: This includes cars, jewelery and everything else.

I have a debts section which contains,

Mortgages: This includes the mortgage loan that I have on my house as well as on other real estate investments.
Other mortgages: Here I track student loans and any other mortgage debt.
Credit Cards: Outstanding balances on the credit card.

Once you have entered all the amounts, just subtract total assets - total debts and you will have your net worth. A negative net worth is common for students who are just graduating and have a lot of student loans. If you have a negative net worth, don’t be alarmed. With correct steps you can slowly move into positive territory. Just realizing that you have a negative net worth will hopefully stop you from purchasing a brand new automobile on a loan.

There is also a free tool available to help track your net worth . It’s called NetWorthIQ. NetworthIQ is a social personal finance manager. It allows you to track, share and compare your net worth. It’s a great way to see how your net worth compares to people of the same age, same income group, same city, etc… You can keep your net-worth private or public. I have kept mine private for now. I know of many bloggers who have their net-worth publicly available. Below I will be including links to their blog. A note of caution: comparing networth with others is fun and interesting but it is more important to set realistic goals catered to your finances and situation.

Net worth