Out With The Old, In With The New: Calculate Your Net Worth

Throughout the month of December, The Simple Dollar is posting a daily series focusing on specific activities you can do right now to set the stage for a great 2011. Out with the old, in with the new.

A long December and there’s reason to believe
Maybe this year will be better than the last

– Counting Crows, A Long December

I’ve always seen the five weeks between Thanksgiving and the new year as a time for reflection and for setting the stage for a successful year to come. It’s usually full of time spent with family and time spent preparing for those family events, too.

This year, I thought I would fill the month of December with a collection of the kinds of activities and preparations that I undergo during this period, both to put some closure on the year that passed as well as set the stage for an even better year to come.

Some of these will work for you. Some won’t. Nevertheless, give as many of them as you can a try. You might find that it’ll put you in a better place than you ever expected.

1. Calculate your net worth.

In my experience, there is no better snapshot of your financial health than your net worth. With one single number, you can get a glimpse of your financial state, good or bad. More importantly, by calculating your net worth on a consistent basis and comparing the numbers, you can get a sense of whether you’re making positive financial progress or whether you’re regressing.

There’s no better time than right now to get started. Here’s what you need to do.

Make a list of all of your assets and their values. How much do you have in all of your savings accounts? Your checking accounts? Your investment accounts? College savings? Retirement savings?

Some people also choose to include assets such as their automobiles and their homes. I generally think automobiles are a poor idea to include because they’re difficult to value properly and they’re not easily liquidated for most people, as they need some form of transportation. It’s up to you whether or not to list your primary residence’s value – I don’t list it on my own calculations.

The important thing is that you use a standard, so that when you calculate your net worth again, you’ll be able to make a fair comparison.

Make a list of all of your debts and their balances. How much credit card debt do you have? What’s your mortgage balance? What about auto loans? Personal debts?

Again, make a list of all of these things with their current balances. As with the asset list, this may take some time as you locate all of these balances. Net worth calculations are a task that’s greatly aided by personal finance software like Quicken.

Add up the assets and the debts separately. You’ll want a total value of all of your assets as well as a total value of all of your debts. Time to break out the spreadsheet or the calculator!

Take the total of your assets and subtract the total of your debts from it. The resulting number is your net worth, and it’s a great snapshot of your financial health.

Ack! My net worth is negative? Many people, particularly young professionals with a big pile of student loans, will find themselves with a negative net worth, something that seems really ominous.

I wouldn’t worry too much about it, particularly if you’re gainfully employed. Instead, I would focus on the month-to-month or quarter-to-quarter change in your net worth. If your net worth is going up on a consistent basis (meaning that negative number is getting smaller and smaller as it heads toward zero), then you know you’re headed in the right direction.

How do I use this information? In my experience, the best use for one’s net worth is to provide a yardstick and a motivator for better personal finance behavior.

First, you can raise your asset level – and thus your overall net worth – by living more frugally and by finding new ways to earn income. If you resist spending, then the money stays in your account. If you earn more money, that money goes into your account. The better you are at either side of the coin, the higher your asset total will be and thus the higher your net worth will be.

Second, you can reduce your debt level – and thus increase your overall net worth – by living within your means and sticking to a debt repayment plan. These methods will reduce your debt load, thus increasing your net worth.

In other words, your net worth is directly related to your financial moves. If you make good moves, your net worth goes up. If you make bad moves, it goes down or stays stagnant.

This is particularly true when you start keeping track of your net worth over time, calculating it (say) on the first of each month and comparing it to earlier net worths. It’s almost like keeping a financial “score” for yourself, one that, if you’re competitive, will make you want to beat your earlier scores through good financial behavior.

I have calculated my net worth each month since 2006. For a while, I calculated it weekly and, for another period, I calculated it every two weeks. All of this data tells me a few things: frugality really does pay huge dividends, getting rid of debts accelerates your net worth growth (because you’re not dumping money into interest), and my financial progress has been a very good thing. I keep the numbers in a spreadsheet – you can use whatever documentation system works best for you.

Get started on your own net worth track record today.

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  1. Catherine says:

    I just filled out my Net Worth spreadsheet today! I do it on the last day (or the first day of the next month if I miss) of the month. I used your template as a starting point, but I also added a row for any notes – ie, Moved money to Roth IRA, bought a car for $5k, received gift of $1k – so I can see a reason for any large jumps in either direction. My boyfriend and I will be merging finances at the beginning of the new year, so I will create a new spreadsheet with all of our accounts on it.

  2. Kate says:

    If you’re not counting the value of your house, why do you include your mortgage? That’s somewhat masochistic, don’t you think?

  3. Meg says:

    I agree with Kate, I do not include the value of my house or my mortgage in my net worth spreadsheet. I do not see my house as an investment or a debt, and of course it would greatly affect my net worth :)

    I do, however, keep track of it separately.

  4. Kat says:

    If you are not viewing your house as an investment, then the mortgage is a debt like any other property debt you have. You would list your credit card debt, but not the clothes you bought with the credit card, for example. Even though some day you may sell your house or your clothes for profit or loss, in the meantime, they are just a place to live and things to wear. I would think a house that is an investment property would be different, though, and its worth included.

  5. Hannah says:

    I think this is a great idea for a series! I am looking forward to the rest of the posts.

    I use Mint so I always have a handle on my net worth. I know Trent is not a fan, but if you’re comfortable with the idea, try setting up Mint! If all of your various financial accounts are supported (unfortunately this isn’t a given) it will save you a lot of manual labor. They send out weekly updates on your net worth, in addition to a lot of other handy reminders and alerts that you can customize.

  6. Johanna says:

    For you to include your mortgage but not the value of your house makes about as much sense as for me to include my next 25-30 years worth of rent as a “debt.” In either case, it’s the future cost of a place to live.

    I guess if you’re just tracking things for your own purposes, it doesn’t much matter what you do, as long as you’re consistent. But if you’re going to be talking to people about your net worth, you need to be calculating something that actually fits the definition of “net worth.”

  7. Kat says:

    Johanna, a mortgage is not the same as rent nor is a mortgage the future cost of a place to live. Rent is paying someone for the use of their property, so yes, the next 30 years of that is a future cost, you don’t owe anything today. Mortgage is buying a piece of property today that you could not afford, so you took a loan and owe that full amount of the loan back to a bank, with the bank allowing you to pay your CURRENT (today’s) debt over a period of X years. So the mortgage is not the future cost of anything. It is the present cost TODAY that you owe a bank.

    Taxes you pay to keep that property every month is closer to a “future cost of a place to live.”

  8. Kat says:

    Further to how mortgage is not the future cost of anything – Trent didn’t say to include your mortgage balance PLUS the interest that you are going to be paying over the next X years. Just the balance you owe.

  9. Mule Skinner says:

    Seems to me you would include the equity in your house. If you sold it for what you paid you could reasonably expect to get that equity out of it.

    And in case of divorce there is usually a division of the equity if you bought it together.

    So, it’s a real thing that you own.

  10. Bill says:

    Current= Payable or Receivable in the next year.

    Quick Ratio = Current Assets/ Current Debts.
    ie. yearly net paychecks/Yearly Bills

    >= 1 is preferred.

    Google financial ratios for more info and more ratios.

  11. Johanna says:

    Wow, thanks for the explanation, Kat – I had no idea.

    The thing is, not only do you owe the mortgate TODAY, but you also own the house TODAY. If you decide TOMORROW that you don’t want the house anymore, you can sell it and pay off the mortgage (or part of the mortgage, if you’re underwater). So why include one but not the other?

    To me, the absurdity of including your mortgage but not the value of your home is highlighted by what happens when you transition from renting to owning or vice versa. Say I’m paying $X in rent, and I move out and buy a place for $Y. (Suppose I pay cash, so we don’t even have to worry about how to treat the mortgage.) According to Trent, and to you, my net worth has just dropped by $Y. But am I really $Y worse off than I was when I was renting? That doesn’t make any sense.

  12. Katie says:

    The other thing is, there are times when you might have to calculate your net worth for legal purposes (e.g., to determine if you’re considered insolvent) where you definitely need to include the value of your house and possibly personal property as well. Doesn’t necessarily matter for your own just-for-fun, back-of-the-envelope calculations (though why you’d want to torture yourself that way is beyond me), but it is good to be aware of the fact that this isn’t the standard net worth calculation.

  13. RC says:

    I look at my net worth every month to see how well I am progressing. I do include home and car value to offset my mortgage and car loan. It’s not too hard to get a rough estimate because Mint now does home value and the kelly blue book site will tell me what the estimated resale value of my cars.

  14. Hannah says:

    I think Kat’s comments are dead on in explaining why the mortgage counts. Net worth has a specific meaning, you can’t just change the definition because you don’t think it’s fair. What you can do is develop your own metric for determining how you are progressing towards your personal goals.

  15. Des says:

    I agree with Katie #12 that a proper Net Worth calculation would include assets such as house, car, and personal belonging that might have resale value (a nice TV, some very nice clothing items, etc.)

    Now, if we are talking about Liquid Net Worth, then we can ignore those things.

    Personally, I calculate the value of my primary residence as the low end of the Zillow valuation minus 10%, because if I were to sell it I think I could reasonably get the low end of Zillow, and it would cost me about 10% in Realtor fees, staging furniture, minor fixes, etc. That gives me a very accurate picture of my actual Net Worth at any given time.

  16. Johanna says:

    @Hannah: Indeed, net worth does have a specific meaning. That meaning does not call for including your mortgage but not the value of your house. The end.

  17. Kat says:

    Johanna, the same reason why most people include a credit card bill, but not the resale value of the stuff you just bought? Why not include the value of any furniture, or your wedding ring, or your DVDs as assets for this sort of exercise? Because none of that is an investment you are planning on ever selling to live off of. You are planning on some day selling your stocks or retirement plans to live of off, that is their purpose. Sure you could sell your house, it has worth, but you could also sell every single item in that house, it has a worth too. When you are calculating your net worth for insolvency, you include your house because you are expected to SELL IT to pay off your debts.

    To further your rent to own thing, if someone buys a $1000 pocketbook, their net worth just dropped by $1000, doesn’t matter what I COULD resell my pocketbook for. So, if someone buys a $250k thing instead of paying a monthly rent bill, yeah, their net worth just dropped if they have no intention of reselling it. What good is the “value” of your house if you aren’t selling it? And anyway, your house is only worth what someone else will pay for it, so any number you pick is completely made up unless you currently have an offer on the house to know its worth.

    So, the answer is, to include one and not the other: you owe a debt (the mortgage). You own an item you aren’t selling, so all it is worth is its current use as a place to live (a house).

    And what do you mean by “worse off”? If by worse off you mean less cash on hand, or less money in retirement accounts, then yes, you are. If you mean “worse off” in that you reduced you future cash outflows for living expenses, then no, you aren’t. But if the house is not an investment, and selling it to pay off your debts is a last resort (which it usually is) then why include it other than to inflate your net worth to make yourself feel better about who much or little money you have?

    A strong argument could also be made for always valuing your house at the cost you bought it for (like business balance sheets). Businesses do not value their property at fair market value. Bet that will be really popular for people who bought at the height of the bubble…

  18. Katie says:

    Technically you probably should include the value of your jewelry and DVDs and whatnot; just, for most people, that resale value isn’t high enough to really make a difference.

  19. Johanna says:

    @Kat: “And what do you mean by “worse off”?”

    You tell me – you’re the one who’s saying that my net worth plummets when I go from renting to owning, and skyrockets when I go from owning to renting. I’m saying no such thing.

    “If by worse off you mean less cash on hand, or less money in retirement accounts, then yes, you are.”

    Suppose I take some money out of savings and use it to pay down debt. That also results in me having less cash on hand, or less money in retirement accounts, and it doesn’t change my net worth a bit. So why are you saying that my net worth changes when I take money out of savings and buy a home?

  20. George says:

    > What good is the “value” of your house if
    > you aren’t selling it?

    You may not be selling it, but if you’re dividing assets (e.g. divorce), then you include the value.

    It can also be an asset when you’re applying for a loan.

  21. Marinda says:

    So what if you have owned the house and I mean it’s paid off. We do upkeep and have always maintained it. Houses in our area run from 159,000 to 250,000 and ours is right in the middle. I count it in assets, because it’s paid off. Our area schools are improving their test scores yearly, our homeowners association keeps up the public areas and we have parks, medical/hopitals and library nearby. Trust me, for us it’s an asset.

  22. Johanna says:

    “What good is the “value” of your house if you aren’t selling it?”

    It would make just as much sense to ask what good is the “value” of your money if you aren’t spending it right this second. (In fact, it would probably make more sense: At least you can live in a house – you can’t do much of anything with a bunch of pieces of paper with pictures of dead guys.)

    If that’s a little too Zen for you, consider this: Chris and Pat have identical balances in their bank accounts, IRAs, 401(k)s, etc. Identical (possibly zero) levels of debt. They live in identical houses, but Chris owns the house free and clear, whereas Pat rents. How can you say that Chris and Pat have equal net worth? Either a home you own is an asset, or a home you rent is a liability.

  23. bill says:

    A house is a fixed asset. It would be added to your “net worth” at full value. The remaining mortgage is a longterm liability that when subtracted from the value of the home reveals the equity. You need both numbers to make any sense of it.
    A balance sheet, an income statement and a cash flow statement all contain elements of what is being called net worth on this site.

  24. Briana @ GBR says:

    I started calculating my net worth first with Mint and now doing it on my own on a monthly basis. It’s definitely depressing to see negative numbers due to my debt, but hoping to reach $250K in 5 years. An aggressive goal but I’m extremely determined to get rid of my debt and start working on my assets. Bookmarking this post to keep me focused on the goal

  25. kristine says:

    I just came from my a financial aid seminar for my college bound daughter. In terms of available funds, a house is considered an asset! Luckily, we do not plan to buy our first house till the kids are done with college. It will be our first, and last, and it will be tiny! But we will likely buy outright. At that point I would not consider it a part of my net worth, because I wold never sell it.

  26. Amanda says:

    Johanna is correct. The definition of net worth is total assets-total liabilities. The NET value of a home is it’s value less what you owe. In finance there are standard formulas. The net worth formula includes the asset value less liab. I

    think the reason there are so many errors in these posts has to do w the fact that he set up this blog as a way to show how to simplify life, not just financial end of it!

  27. getagrip says:

    “If you make good moves, your net worth goes up. If you make bad moves, it goes down or stays stagnant.”

    I don’t agree with this statement. It assumes no major changes or expenses, even if planned for and implies that it’s “bad” if your net worth goes down. Net worth is only a tool to give you an idea of where you are now compared to where you were at some point in the past. It can easily go negative for good reasons (e.g. you needed a new roof for the house or major car repair or started a graduate degree program) so you don’t have to pin this idea it must go up every month or year. The real point is use various financial tools to be aware and conscious of what you’re doing and use the net worth tool as a tool to see where you’re at, why you’re at that point, and help you figure out what you may want to change to do better.

  28. Matt says:

    I think the point that Trent made was that he wasn’t telling you what you must include in your net worth, but to just be consistent.
    I personally include my mortgages as debt, but don’t include their supposed worth. When it comes time to pay the mortgage each month, the amount is deducted from my checking account (assets) and a smaller portion is removed from my mortgage principal (the remainder going to interest, obviously). So the net loss per month is essentially exactly the mortgage interest.
    This is all just accounting.. determine the best metric for you and stick with it. As soon as you try changing it, your metrics have to be redone and comparisons to the past are lost.

  29. Kevin says:

    Two best friends, Renty and Owny, graduate college and enter the real world, earning exactly the same income.

    Renty gets an apartment costing $1,000/month. He invests another $1,000 in his retirement savings every month.

    Owny instead buys a house. His mortgage payment is $2,000/month, so he has no extra money left over to save for retirement. Suddenly, according to Trent’s “net worth” yardstick, Owny’s net worth is $200,000 less than Renty’s.

    15 years later, Owny’s house is paid off, but he has no retirement savings. Meanwhile, Renty has saved up $220,000 in his retirement savings.

    According to Trent’s bizarro math, Owny has a net worth of $0, while Renty has a net worth of $220,000, even though they’ve both paid exactly the same amounts over the years.

    The point of this whole article is that “net worth” is a great yardstick to tell where you are financially. But by using Trent’s (and apparently Kat’s) guidelines, the resulting value is obviously horribly flawed, by excluding the home and mortgage. The whole time, Owny has been at least $200,000 “behind” Renty, even though their financial situations were essentially identical.

  30. Matt says:

    @Kevin:
    The only way to compare net worths is to have the same metrics. Your Renty and Owny comparison is ultimately flawed by using different metrics, as you even admit to. So I don’t see how your flawed metrics somehow contradict Trent’s suggestion that Net Worth is an indicator of how well you’re doing.
    I mean, if you’re comparing your last month’s net worth to this month’s net worth, and your metrics have stayed the same over the course of that month, can you really argue that an increase in net worth means you’re better off financially this month compared to last month?
    Using your arguments, you might as well argue that Renty donated more used clothes to the Salvation Army, got a bigger tax deduction, and so his net worth is technically higher than Owny’s. I mean, really, you can argue and try nitpicking all you want, but Trent’s logic is sound, I’m afraid.

  31. Matt says:

    @Bill:
    Perfectly said, that’s the true accounting measure of net worth. If you can actually set up a ledger to perfectly capture all your assets and liabilities, you would get rid of all the huge jumps and drops that selling a house, buying a car, etc would cause on your net worth.
    But this would even go so far as trying to measure the cost of the replaced roof vs the “full value”.. you’ve got to cut it quits sometime :) So there will always be ups and downs — the purpose is to have an overall increase in your networth, or something’s not right!
    @getagrip: You said it right as well. Net worth is worthless as a metric if you don’t understand how to interpret it. If you undestand where the ups and downs come from and know how you’re doing, that’s the ultimate goal of the net worth metric. Good call :)

  32. Bill says:

    @Matt

    I agree the financial accounting methodology only works so well when dealing with people instead of companies.

    Insofar as the roof goes, you could estimate the value it added to your home and recognize the cost as a one time expense.

  33. Kevin says:

    @Matt:

    Right. But the problem with Trent’s methodology is that as soon as Owny graduated college and bought his house, his net worth plummetted by $200,000.

    You’re right that its real utility is in measuring month-to-month changes. So did Owny’s situation really deteriorate by $200,000 in a single month? Or is the input data set flawed?

  34. Kenny says:

    I don’t have a house, but I include my car. I just use KBB and kijiji to get an idea of what it’ll be worth next year, and take the difference/12 away from the value each month. I try to err on the side of underestimating its value.

    The reason I think it should be included is because it better shows the true cost of owning a vehicle. My liabilities decreases by my car payment each month (minus interest), but my asset also decreases (although hopefully at a lower rate). So now I can see the true cost of driving my car for that month was the interest + the depreciation. Also my networth doesn’t increase by the full car payment.

    Click on the website for this post to see my template google docs balance sheet. I just create a new column each month.

  35. Jennifer Lissette says:

    Calculating my net worth has felt rather pointless lately. I’m making good moves and living on a mere 36% of my net income. I’ve paid off all consumer debts, upped my retirement contributions, opened college savings for my child and paid down my mortgage.

    For the last six months, my home value has been dropping an estimated $10,000 per month. I can be frugal til the cows come home, I haven’t even had a haircut in 18 months. I could live on 1% of my salary and with my house dropping like that, my net worth is not going to go up. Any advice for when you’re doing everything right and your net worth is still just a depressing exercise?

  36. Randy says:

    @34 Kenny
    I see you have an account at Under the Bed Savings & Loan. Do you prefer them to the Hole in the Backyard bank? :)

  37. Mule Skinner says:

    @35 Jennifer Lissette
    Housing values can rise or fall. Recently they have been falling, but I expect them to rise again. Whether yours gets back to the original value will depend on the location and a variety of other factors.

    If you like your house, and if you paid what you considered a fair price for its package of features, then you are still enjoying the value of the money you paid. My house has gone up and down but I never sold so it didn’t matter.

    I also own stocks in various companies. Some of those are now cheaper than when I bought them giving an appearance of lower net worth.

  38. Evita says:

    Wow! when you sell you house and liquidate your mortgage, you will instantly be $100K richer! (another irritated accountant here bemoaning the mis-use of “net worth”). I agree with comment #2, exactly my thought!

  39. AniVee says:

    @35 Jennifer Lissette is doing everything right and yet she finds calculating net worth by Trent’s method a “depressing exercise” !
    That shows something is wrong with Trent’s method although doing the calculation each month is a great idea.

    Of course you should include the value of your house as an asset (and the principal still owed on your mortgage as a liability/debt).

    The question then is, “what is the value of your house?” and it is my understanding that accounting rules and CPA standards say that you must put it on your books at WHAT YOU PAID FOR IT plus the value of any CAPITAL IMPROVEMENTS you did to it (redoing the kitchen counts, reupholstering the sofa doesn’t).

    You don’t get to speculate wildly about what you hope/think/pray it is worth. If you under- or over-paid for it, you can add that in a footnote, but the value on the books must be what you paid for it, plus improvements that are permanent and are expected to last as long as the house does.

    Do the accountants out there agree?

  40. Johanna says:

    @Jennifer Lissette: There are several things you can do.

    You could just ignore your net worth for a while – no one says you *have* to keep track of it every month. Leave it alone for a while, calculate it again six months or a year from now, and you might think “Wow, that’s not as bad as I thought it would be.” That’s basically what I did in 2008-9 when my stock investments tanked.

    You could break your net worth down into different parts, keep track of them separately, and focus on the ones that are going up.

    You could go back and calculate your past net worth as if the housing boom/bust had never happened. Take your home’s value in, say, 2000, and pretend that it’s been going up at a more sensible rate of 2-3% per year. That may be the best approach if you bought your home prior to the boom and didn’t borrow at all against your equity – the inflated values of 2005-2006 were just “play money” that was never really real, so losing it is no big deal. On the other hand, if you bought at the peak, taking this approach would mean that your net worth took a big, big drop when you bought your home, since you paid much more for it than it was “really” worth. But on the plus side, your “real” net worth has still been increasing ever since then.

    One thing I do not recommend is latching onto your home’s 2006 price as its “real” value, and holding your breath until its value returns to that level. Peak-level prices were not real. They only rose to that level because banks were pulling all kinds of accounting shenanigans to justify issuing loans that people were never going to be able to afford to pay back. Those prices are not coming back until inflation lifts the prices of *everything* by that amount.

  41. David says:

    Alternatively, you could not move house. Then, the value (or price, which is not the same thing at all) of your current property will not matter in the slightest.

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