December 14, 2010

How to Calculate Net Worth

Every month I track and post updates on my net worth.   I don't think I've ever written anything in detail on how I track net worth or how it can be figured.

What is Net Worth?

Your net worth is the total value of your property and money.   Say you could 'cash in' everything right now and walk away with a check.   Your net worth is the amount of money you'd get for that pretend check.

Simply put the formula for net worth is :

Net worth =   Sum of Assets - Sum of Debts

So to figure your net worth you have to account for all your assets and liabilities and you have to know what they are all worth currently.

Add up Your Assets

Adding up your assets is a process of inventorying everything you own, determining the value of the assets and then adding them up.

Your assets will include anything of value that you own such as : your home, other real estate, businesses, cash, stock funds, retirement accounts, bonds, personal property, cars and 'other'.   For some of your assets the value is obvious.   $100 in a checking account is worth $100.   However for other assets you may not have an easy or accurate estimate of the value.   For those I would do the best you can to estimate the value.   For real estate you can use a site like Zillow.    For cars you can use Edmonds to estimate value.  Most of your personal property you wouldn't want to figure values for if they are household items.   If you have a collection of significant value then you may want to add those.    Other items that you might count as assets would include things like debts owed to you from others or paycheck or other compensation that you're due to receive but haven't yet.  If you own a business or have a stake in a private business then that may be difficult to put a value on.   Finding an accurate value for a small business is an entirely different topic, so here I'll just say that you should estimate the value to the best of your ability by including the assets such as inventory and property values owned by the business.

Add up your Debts (Liabilities)

Adding your debts should be easier than your assets and simply takes summing the outstanding balance on any debts you owe.

Your liabilities will include any debts you owe people.    Mortgages on real estate, student loans, car loans, credit card loans, personal loans, business loans, IOU to your uncle Bob, etc.

Your liabilities should be stated in your loan documents.   Your mortgage statement will have a principal balance which tells you how much you owe on the mortgage.   To find your liabilities you can simply look at the monthly statement for each account to find the outstanding balance.

Figuring the Net worth

Once you have summed up all your assets and liabilities its a simple matter to calculate the net worth total.  Subtract the debts from the Assets.

Deciding What to Include

Some people decide not to track certain things in their net worth.   What you track exactly is up to you.  Figuring a net worth is for your own information so how you do it is up to you.   You may or may not want to include things like your car or your home.   

Lets Look at an Example

Bob Smith is 25 years old and single.  He graduated college a couple years ago and bought a house.

Bob's assets:   His home, retirement account at work, 2007 Honda Civic with dent in fender, checking account, savings account, Roth IRA, US savings bonds Nanna gave him when he was 8 years old.
Valuing the assets:

Home :  Bob goes to Zillow and looks up his address.  The Zestimate price from Zillow says his house is worth $185,000.
Car : Bob goes to Edumonds and uses their used car appraiser to look up his Honda.   Edmunds says that if he sells his Civic as a private party it should fetch $13,702.  However he knows that dent would cost him $800 to fix so he counts the car as worth $12,902.
Retirement, Checking, savings account, Roth IRA, Savings bond:  These items are easy to value.  Just look up the current balance in the account.   Bob has $23,105 in his 401k at work, $8083 in his Roth IRA, $10,605 in his cash accounts and that savings bond is now worth $1,146.
Bob's Assets:

House : $185,000
Car : $13,702
401k: $23,105
Roth IRA : $8,083
Cash : $10,605
Savings bond : $1,146

Total assets : $241,641

Bob's debts include a mortgage on his home, student loans and a car loan.    Bob's mortgage balance is at $179,286 his student loans total $23,000 and he owes $4,000 on his car loan.
Bob's Debts :
Mortgage : $179,286
Student Loan : $23,000
Car loan : $4000

Total debts : $206,286

Net worth = total assets - total debts =  241641 - 206286 = Bob's total net worth =  $35,355

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