How to Conduct a Net Worth Review

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How to Conduct a Net Worth ReviewFor 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.

Assets

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:

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.

Liabilities

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:

  • Mortgage
  • 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.

Your thoughts

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.

11 Responses to “How to Conduct a Net Worth Review”

  1. Anonymous

    Why is nobody trying to calculate and include the current value of their (vested) defined pensions? These have significant value for many unionized and government workers.

    The value’s not hard to estimate — just look at the cost of buying an immediate annuity that generates a similar income stream. For many families, this will be a “new” asset — and often one that’s worth $1M and up.

    (Theoretically, one could try a similar valuation exercise with social security payments. I’m interested to see if anyone’s doing that too)

    (Lastly, is anyone including a current value of college tuition payments that they’ve “promised” to their kids? If you’re serious about paying, it’s what an accountant would call an unfunded liability and can/should be included in your net worth.)

  2. Anonymous

    Another vote for NetWorthIQ here! I’ve been using it for about three years. I usually update every other month and I include house (and rental property), car, savings accounts, stocks, mutual funds, and retirement accounts as assets, but not personal items. I do this because my goal for the exercise is really to keep track of all our numbers… not as an estimate of how much I could have if I sold everything I could.

  3. Anonymous

    I only include the house, bank accounts, stocks and mutual funds. I don’t see the point of including cars, watches, jewelry and other personal belongings.

  4. Anonymous

    I’m glad to see NetWorthIQ mentioned (Floridian @ #1). I’ve been using it for about a year now; I think it is a great tool.

    I do include the kbb quote for my car, use Zillow for my home value, track my mortgage (only debt), various bank accounts and retirement accounts. I do not include anything for personal belongings (furniture, clothes, etc.) I have seen PF bloggers include that too, but I think that amounts to padding the truth to make yourself feel better (my opinion).

  5. Anonymous

    @Floridian: Comparing Zillow’s prices to recent sales in our neighborhood seem to be pretty accurate.

    I’m working towards improving my writing. Even though I check it several times, I see I need to get a second person to check my final draft. Thanks for the feedback.

    @Everyone: I’m fascinated to see many people not include their cars. It’s interesting to see how other track their finances.

  6. Anonymous

    I include my home using Zillow (picking the number at the low range of their estimate). I don’t include cars since they are a depreciating asset,also because we pay cash, and because we usually keep our cars until their last stop is the junk yard! If we had an auto loan, then I would probably add them as an asset until the loan was paid off.

  7. Anonymous

    I wouldn’t include my car value in calculating net worth.

    I think of net worth as what you have available to potentially spend after deducting liabilities.

    If I included the car value, it would mean selling the car. But at this point, I wouldn’t have my main means of transportation.

  8. Anonymous

    we track “Net worth excluding Primary residence”! We do include Mortgage into liabilities, but don’t include home equity into assets. Not saying this is the right way, just our preference. We do it to motivate ourselves to payoff the mortgage as quickly as possible and come back into “black”. Don’t include cars in asset because I think of cars as “needs” and hence any expense related to cars as part of “cost of living”. So yes, every few years we have a major “expense” when we buy a car and it drops our net worth by a few thousand dollars.

  9. Nickel

    John: Excellent point. This is especially true later in your investing life. Early on, portfolio changes are governed more strongly by ongoing contributions. Over time, however, dramatic market moves will dwarf new contributions.

  10. Anonymous

    One thing you must take into account is that retirement account values can shift quite a bit in a volatile market like we are in right now. If you are doing monthly recalculations to determine progress a large change in the value of your 401(k) or IRA can give misleading information.

    I do a monthly recalculation of my debt load and fully liquid and FDIC insured accounts and ignore the value of my 401(k). I include the house and mortgage but have stopped including my vehicles. Both are 8 years old and have little durable value and no debt associated with them. Since vehicles have a variable value it simplifies the calculation to ignore them in terms of net worth. If I had some sort of rare or special car which had a more stable value I might include that in my net worth, but I don’t see myself purchasing anything like that in the next decade.

    In the last 6 months I have reduced my debts by just over $15,000. $7900 was from the homebuyer tax credit, but I can take credit for $1200/month of debt reduction!

  11. Anonymous

    My job (with government) requires that I do this every year as of December 31st and disclose it (although I will periodically calc mid-year & compare to prior EOY). I have a spreadsheet with the history of our networth (calculated the way the government wants) going back to 2006. It is interesting to go through the years and analyze each line.

    We include the house – using zillow’s estimate, which I will compare to recent neighborhood sales info obtained from the property appraiser site (I have found zillow is always on the low side for our neighborhood, so using zillow is a good conservative estimate). I do NOT use the property appraiser’s estimate of our house (you do know that, as a rule of thumb, property appraisers typically appraise at least 15% below actual market value, don’t you?)

    We include the cars also, selecting the condition on KBB that is at or below (usually below) the actual condition of our cars for private party sale (which is always lower than dealership sale). For example, at 12/31/09, the SUV, which was just over a year old, was still in “Excellent” condition, so I used KBB’s average of “excellent” and “good.”

    We do not include any personal items.

    To get a real picture of net worth, people SHOULD include the house, cars, and related debt. (especially since so many people are upside down in one, the other, or both!). If you exclude these, you will never have a TRUE picture of your financial progress (when comparing networth over time).

    There is another website I’ve seen people use – networthIQ.com. It walks you through the same process, will send you monthly reminders to update (if you wish), and allows you to compare your networth to others the same age, or with the same job or income. It will also give a cute little chart of your progress that you can drop into your blog 😉

    PS – Not to sound harsh, but Laura’s posts are always full of so many grammatical errors. (more so than other blogs – it’s kind of hard to read sometimes!) If you need a proof reader/editor for your blog, I can help.

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