Tracking your net worth is an important step in planning for long-term financial success. What is net worth? Net Worth = Assets – Liabilities. A net worth statement is a financial snapshot on a given day. A periodic review of one’s net worth provides a quick assessment of overall financial condition.
Tracking changes to net worth doesn’t have to be difficult. There are multiple financial programs that can help monitor progress, such as mint.com or hellowallet.com. Or, our website contains a fillable worksheet, which can be accessed here. Regardless of the method chosen, the key is to have a complete profile with as much information as possible. This critical information will allow you and your financial planner to create a customized plan to help you reach your goals and keep track of progress.
Step one: add everything owned to the asset side of the net worth statement. Most investment or bank accounts are easy to enter, as the statement balance is very clear. The tricky part lies in identifying and correctly valuing the other types of accounts or assets. Do you have old 401(k) plans? How about savings bonds in a safe deposit box? Many people mistakenly include the death benefit of term life insurance policies into the assets column. Only the cash value of permanent policies should be entered. Real estate assets are slightly harder, as there isn’t a liquid market to determine the fair value. Enter your best estimation. Don’t forget to add land or royalties, as well. Personal property, such as vehicles and jewelry, are also included in the assets section; however, take care to avoid overestimating their value.
Step two: enter the debts you owe to other companies or people. The liabilities section is the second part of the net worth equation. The most common liabilities will be mortgage debt, car loans, outstanding credit card debt, and student loans. If you have back taxes or alimony and child support owed, add them to this section as well.
Last step: subtract the amount you owe to others from the amount you own. The number you calculate is your net worth. Net worth should be reviewed at least annually as part of the financial planning process, as it is an excellent tool for quickly accessing areas of progress and areas of difficulty.
While net worth is just a single number and only one part of your overall financial picture, it tells the bottom line about your overall financial health. Knowing where you stand can help you become aware of your financial habits and be better prepared for many of the financial decision you’ll be making down the road.