A Diamond in the Rough
What are you worth? I would hope you would reply that you are of infinite value, but for those of you that are more pragmatically minded, you would answer with the amount of your net worth. Net worth is essentially the grand total of all you assets subtracted by your liabilities. It is a useful tool to help you determine your financial outlook as you want it to improve it from year to year. The larger the number when it comes to your net worth, the more financially independent you are. When you are in the negative, you know it is time to start reducing your debt, increasing your investments, and getting yourself out of the hole you have dug. The nice thing about it is that it is relatively easy to determine what your net worth is.
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Step #1: Listing and totaling the assets.
Start determining your net worth by listing all of your large assets. Large assets could include your home (or the amount that you actually own in it), vehicles, recreational toys (boats, motorcycles, etc.), and large electronics. Only use the amount that you actually own in the item using real dollars and conservative estimates. If you over estimate it might make you feel better, but it won't help your personal finances or your financial future, so be honest with your estimates. Once you've listed all of your large assets you should determine their current market value and total them under the heading of large assets.
When your large assets are listed, move on to liquid assets such as the average amount in your checking and savings accounts, total investments (stocks, bonds, mutual funds, CD's, etc.), cash on hand, retirement accounts, etc. Total these under the heading of liquid assets.
Lastly, list any small assets that are of market value such as jewelry, electronics, collections, instruments, and other personal items. You don't have to list everything you own, but at least list the smaller assets that are of the most worth. Total these under the heading of small assets. Add all the totals of your assets together for a grand total of your assets.
Step #2: Listing and totaling the liabilities.
Once again, start determining your liabilities with the largest. What you have remaining on a home mortgage, vehicles, and other loans could count among your largest liabilities. Total these under the heading of large liabilities.
Next, you'll total your personal liabilities such as credit card debt, student loans, pay day loans, and other types of loans. Any money you owe is a liability, so include everything and total it under the heading of personal liabilities.
Add the liability totals together. You want to be exact as possible when doing this, so be sure to use financial statements and real time information.
Step #3: Adding it all together.
When you have determined your total assets and liabilities you can combine the numbers to determine your net worth. Subtract the liabilities total from the assets total to determine it. Repeat this process on a yearly basis so you don't loose sight of how much your net worth is. This will help you to figure out whether you are making progress of not and what you can do to change if necessary. It will help you determine whether your purchases have been investments or unwise purchases that hurt your net worth.
