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How To Calculate Your Net Worth
Posted By Jim On 04/11/2007 @ 9:30 am In Personal Finance | 16 Comments
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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