Net worth is a technical term for performing a simple calculation: (Assets) – (Liabilities) = net worth.
Assets refer to everything from your cash in savings and checking accounts to equity in your home to investments and retirement accounts to even your jewelry, art, furniture and anything else of value you own. Liabilities are your debts, such as student loans, car loans, mortgage, and credit card debt.
Running a net worth calculation enables you to take a bird’s eye view of your financial life, although it’s not always positive.
My number is negative…
Not only is it possible to have a negative net worth, it’s not at all uncommon, especially for those early in their careers who are also paying off student loan debt. Consider this example: you graduated from college three years ago and earn $45,000 a year. You saved up $5,000 in your 401(k) and have another $3,000 in emergency savings. You have around $7,000 in assets from your car, but your furniture is mostly secondhand or from IKEA. You’re currently paying off $25,000 in student loan debt.
Your assets are worth $15,000 but your liabilities are $25,000, so you have a net worth of -$10,000.
Is everything I own included?
Ultimately, pretty much. Anything that’s truly of value should be included in your net worth calculation. However, instead of trying to assign a price to everything you own down to the Target frames around your photographs – it’s much more helpful to focus on the items that are true assets and for which someone else would likely pay you well. Your cash, investments, retirement funds, home, nice pieces of jewelry (e.g., an engagement or wedding band), even collectibles, such as signed memorabilia, can be included after you get it appraised.
A car loan would be a liability, but a car should be listed as an asset. However, you want to be sure to change the price overtime since it is a depreciating asset. What it was worth two years ago isn’t the same today.
How often should I calculate my net worth?
Calculating your net worth doesn’t need to be a regular activity. In fact, once or twice a year is often enough for most. Although, the practice does help demonstrate the balance sheet of your financial life. It also helps you easily determine whether or not you’re making progress. Even if you have a negative net worth, watching it move closer and closer to $0 is exciting and a mark of your financial health progress.
One advantage of keeping at least a semi-regular eye on your net worth is assessing the asset allocation of your investments to make sure they’re aligned with your financial goals.
For the sake of your mental and financial well-being, however, you may not want to check in on your net worth daily or even monthly. That is particularly true if you tend to have a knee-jerk reaction to fluctuations in the stock market.
What can I do to protect my net worth?
There are always going to be variations in your net worth from month-to-month. Things like the stock market, changes in your home’s value, or big spending months impact it. It’s important not to get hung up on small month-to-month changes, but rather focus on the long-term.
Consistently saving, investing, and paying off debt are ways to be diligent about improving and protecting your net worth. You should also focus on all your short, medium, and long-term financial goals and how they are of service to the greater net worth picture. You shouldn’t focus exclusively on your net worth. Instead, appreciate it for being a snapshot of your total assets and debts.
Source : TaxAct Blog