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For many people, figuring out their net worth can be a stressful (or depressing) exercise. As for me, I run a net worth review on a monthly basis, and use it to keep us on track with our finances.
Reflecting on our net worth has been a helpful tool and a great complement to managing our monthly cash flow. I really do find it to be empowering, and it gives us a great “big picture” measure of the progress that we’ve made.
What to include in your net worth calculation
It’s important to identify which assets and liabilities you’ll be including in your net worth review. Some people pick and choose about what they include, whereas others want a more comprehensive view. It’s your prerogative, but understand that the things that you track are often those you wind up focusing on and improving.
In the “plus” column, we have assets. There are a number of different things that can be included here, and you can be as thorough as you want, even breaking down categories down to individual accounts.
They typically include:
- Bank Accounts (including checking, savings, money market accounts)
- Appraised value of your house
- Retirement account balances
- Estimated value of your car(s)
- Personal belongings (e.g., jewelery)
Some people feel that including the value of your car(s) and home is a flawed approach, as you can’t (and often won’t) liquidate them in a pinch. Others feel that your home’s value is every bit as valid as your 401(k) balance. To me, this is a personal choice. However, if you choose to leave out big ticket, but illiquid items, then you’re really tracking net investable assets as opposed to net worth.
Personally, we include our home’s value as as an asset, and we subtract our our current mortgage balance (more below). We figure that our estimated home equity should be counted. To keep it realistic, we use the lowest amount between tax appraisal, Zillow’s assessment, and recent neighborhood sales.
People are sometimes tempted to minimize, or in extreme cases, ignore their liabilities estimating their net worth. It really is to your detriment not include them in your calculations.
Liabilities that you should track can include:
- Car loans
- Credit card debt
- Student loans
- Home equity loans
Listing and tracking your liability is the hardest part for many people, but it’s also the most informative. It can hurt to see how large your debts are, but there’s nothing more motivating them staring them in the face.
As a general rule, you should include all of your consumer and educational debts, and then include (or not) your home and auto loans depending on whether or not you included your home and car(s) as assets. Here again, it depends if you’re truly interested in net worth, or your investable assets.
Once you have everything organized, figuring your net worth is very easy. Simply total up your assets and subtract off your liabilities. The most productive part of your net worth review, however, is the game plan you will (or should) develop once you start tracking your progress.
Tracking your net worth over time
Recording your net worth once has limited benefits. This exercise is most instructive — and fun — when you track your progress over time. Two tools that I use for tracking our net worth over time are Mint and Quicken. Both do a great job of helping you break things down and see more details.
Reviewing and reflecting on your net worth
The simple act of tallying up your numbers has limited value unless you set aside some time to analyze the results. Your net worth is simply a snapshot of your financial status. When viewing it, ask yourself:
- What’s been working since my last review?
- In what areas have I been struggling?
- What’s have changed since my last review?
As you periodically review your net worth, you can start setting financial goals. People often set a vague goal of increasing their net worth by growing their assets and/or paying off debt. Instead, try setting a specific goal based on the data that you gather, and maybe even try to stretch things a bit.
For example, if you’ve averaged $250/month on debt reduction, try stretching that to $300-$350/month. As you gather more and more data, you’ll be able to fine tune your financial system. Which months are the hardest when it comes to debt reduction? Why were you able to beat your savings goal by so much last month? And so on.
Do you include the value of your house (and mortgage) in your net worth calculations? What about your car(s) and associated loans? To me, the key is to be consistent. Ultimately, you’re doing this for yourself, so do what works for you.