If you want to measure your financial progress, then you really need to understand your net worth. This is simply the value of all your assets minus the value of all your liabilities. This is different from how much money you have in the bank – it takes into account everything you own as well as your debts, rather than just how much cash you have. Obviously, the goal is to have your net worth increase over time – in fact, you should have yearly objectives on how much you want your net worth to increase.
Make a list of your fixed assets
Your fixed assets are things such as your home, your car or any other possession that has value. For example, this could include jewelry, collectibles such as baseball cards, art and even furniture. Make a list of all of these, and get accurate estimates of their value. For instance, find out the current market value for your property in the area where you live – a good way of doing this is to look at similar properties that have sold in the area recently. Use resources such as the Kelly Blue Book to value your cars and other vehicles, and get professional valuations for other items such as antiques.
Add all of these up and it will give you a picture the value of your fixed assets.
Include your liquid assets
Liquid assets are assets that can be converted to cash very easily. For example, this includes money that you have in the bank or in certificates of deposit, as well as any stocks, mutual funds or bonds. Also add in any money you have in retirement funds, including your 401(k) and any IRAs. Don’t forget to include any physical cash you may keep in your house or elsewhere. Any cash value in your life insurance policy should also be included, as should any money people owe you – provided that you know you’re going to be paid back.
Add this to your fixed assets, and this will give you your total assets.
Determine your liabilities
Liabilities are simply the debts that you owe. For example, this includes the amount still to pay on your mortgage, the amount due on car loans, or the balances that you are carrying on your credit cards. When you calculate these debts, don’t simply add up all the payments you still need to make, since this will be significantly more than your actual liability. Instead, find out how much it would cost to pay off the debt today if you had the money available. This is the amount that you should include in your liabilities.
Calculate your net worth
Calculating your net worth is very simple. Just subtract the value of your liabilities from the value of your assets. Hopefully, this will be a positive number, but it can also be negative. Under certain circumstances, it’s perfectly okay to have a negative worth – for example, if you are just starting out after leaving college and still have large student loans. On the other hand, if you are in your 50s and discover that your net worth is negative, it’s time to come up with an action plan to get out of debt.