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How To Calculate Your Net Worth

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Calculating your net worth is something you see a lot of personal finance bloggers doing these days and it’s something that you may have done or be tempted to do in the near future, so let me explain what I believe is the best approach to arriving at this number. Before we get into the nitty gritty of the additions and subtractions, we should talk a little about why you want to calculate your net worth and where I think its value is.

The greatest value in knowing your net worth is that it’s a statistic that you can track on a monthly, quarterly, semi-annually, or annually. It’s a lot like other gray area metrics, you can’t, and probably don’t and won’t, compare it with your friends and relatives (or total strangers via a blog on the internet) because everyone arrives at this number slightly differently. The whole point of knowing your net worth isn’t so that you can brag about it, it’s so that you can track its progress and know, objectively, whether you’re on the right track or the wrong track. Ultimately, that means that there is no “right” way to calculate your net worth, just your way and as long as you stay consistent, that is the right way.

Here’s how I do it, I separate it into two pools: retirement assets and liquid assets. I find this is important because the retirement assets portion of the figure essentially stands alone because I never intend to touch it until retirement, it’s the liquid assets portion that interests me the most because that’s the one most affected by day to day affairs. With retirement assets, I just look to see that there is regular growth based on contributions and appreciation and pretty much leave it alone.

Within liquid assets, the trickiest portions are with fixed assets like the house and depreciating assets like the car. For the house, I list it at the purchase price of the home and I never touch it. If my neighbor sells his house for a million dollars, my home will still appear on my sheet at the purchase price. Why not leave it off the calculation? I have it on to offset the value of the mortgage loan which, if not offset, would pull my net worth figure deep into the red. As for the car, I simply put the Kelly Blue Book value and check maybe every six months to see where it is and that’s mostly to operate under the same loan offsetting principle (though I don’t have a car note).

Everything else is just a number pulled from the various electronic statements I pull up at the end of the month and I sum everything together. While my approach may not satisfy the stats and number junkies out there, I think it is the best method for me and that’s ultimately what matters. Remember, do what makes sense for you.

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16 Responses to “How To Calculate Your Net Worth”

  1. Nick says:

    How do you account for improvements to your house? Spending $2,000 on new tile for the bathroom or redoing a kitchen for $20K? Do you increase the value of your house based on the cost of the improvement?

    • jim says:

      You will want to record that as a capital improvement of some kind and add it to the value of your home.

      This is doubly important because you’ll want to track large improvements because it increases the cost of your home and consequently will reduce your tax burden when you sell it.

      • tinyhands says:

        I don’t think Nick’s question was so much “how” as “why” because you said that you don’t change the value of your home from the purchase price.

  2. I haven’t really been tracking my net worth (I really should) but I would use a similar method for offsetting the mortgage w/the house value.

    However, I wouldn’t include the vehicle in my net worth. By the time I sell it, it will be worth very little and at any time I could crash it (or have it crashed into in a parking lot) and it would be worth next to nothing; the insurance would just help me with a down payment on another vehicle.

    I hope that I have enough cash reserves the next time that I need a vehicle that I can pay for it outright; I like not having a vehicle payment every month.

  3. I think you’ve hit the nail on the head with your consistency is key message. That’s the most important point.

    As a real estate investor, however, I take a different view on marking property at the purchase price and never touching it.

    Over the long run, solid real estate investments can be a key component in building wealth. It’s useful to know when you’re sitting on a bunch of equity. For those folks who’ve enjoyed the run-up in some overheated markets now might be the time to cash in – or at least re-optimize their portfolio.

    This isn’t something you’ll want to do frequently, or you’ll introduce a lot of noise (and, probably, misplaced optimism) into your results. But in my opinion you should take a look every now and then, otherwise you’re not getting a complete picture.

  4. I think you’ve hit the nail on the head with your consistency is key message. That’s the most important point.

    As a real estate investor, however, I take a different view on marking property at the purchase price and never touching it.

    Over the long run, solid real estate investments can be a key component in building wealth. It’s useful to know when you’re sitting on a bunch of equity. For those folks who’ve enjoyed the run-up in some overheated markets now might be the time to cash in – or at least re-optimize their portfolio.

    This isn’t something you’ll want to do frequently, or you’ll introduce a lot of noise (and, probably, misplaced optimism) into your results. But in my opinion you should take a look every now and then, otherwise you’re not getting a complete picture.

  5. Scott says:

    Well, I look at as my net worth and my financial net worth.

    Net worth includes the house and car- financial net worth does not. I also include value of items not yet realized, stock options, rights, warrants etc.

    I also figure in inflation and taxes(AMT) so I can see how I am keeping pace with my buying power relative to the big number.

  6. Minimum Wage says:

    My net worth is minus five figures, and I doubt it will ever get to zero. Why would I want to calculate it? I’m not THAT much of a masochist.

  7. F2O says:

    I agree that consistancy is the key as well.
    But I still struggle with the home value every month. I’ve owned the place since 1999 and made major improvments. Since the house was bought cash and I took out a loan to do all the construction, the mortgage only offsets a small portion of the value. Plus, even with the pullback in the market, I know the house is worth more now than it was then.
    What I’ve used recently was the price similar homes recenently sold for on the street. Since the last time a house on my street was for sale was in 2004, I used that amount. The thinking is that it gives me a ballpark estimate without the overzelous expectations that can go along with home prices of the past few years.

  8. miller says:

    Just a quick thing to add. Start SIMPLE and then work your way up. I ended up with a spread sheet that is so complicated that I haven’t updated it in about a year. haha.

    Sophisticated (… complicated…) is nice, but if its so much that it because a burden, or it takes more time to use that you’re willing to give, then obviously it doesnt work for you.

    My next cut at tracking this will be much simpler and “dumber.”

  9. FinanceGirl says:

    It is always confusing to calculation by yourself.
    I gave up already because I always end up with the different figure than it actually is.
    Now I’m using the personal finance software by Parcus Group and all work out amazing for me.
    I don’t need to do any calculation anymore. All i need to do is enter the data then i get all the correct reasults.
    Such a relief!
    Just go to:
    http://www.parcusgroup.com/index.html

    GOOD Luck!!!

  10. Net Worth vs. Net Investable Assets

    If you regularly read personal finance weblogs, then you know that writing about one’s “net worth” is a fairly popular topic. While I understand the importance of metrics for tracking your progress, I have to admit that I’ve nev…

  11. Jim says:

    How does one include retirement annuities in calculating net worth? Before I retired I could determine a cash-out value, but after annuitization, it is just a monthly income.

  12. jim says:

    @Jim – One option is to find the current cash value of the stream of income, you can do this pretty easily by discounting cash flows.

  13. Jim says:

    I don’t know how to do that – suggestions, guidance?

    Thanks…

  14. FlyFisher says:

    Is Jim talking to himself…

    Great idea to use the Blue Book for car value. I think I will update the value of my home every so often in order to have a more accurate number.


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