Your financial net worth is an important barometer of your monetary health.
Your net worth indicates your capacity to accomplish major financial goals,
such as buying a home, retiring, and withstanding unexpected expenses or
loss of income.
Your financial net worth has absolutely, positively no relationship to your
worth as a human being. This is not a test. You don’t have to compare your
number with your neighbor’s. Financial net worth is not the scorecard of life.
Your net worth is your financial assets minus your financial liabilities:
Financial Assets – Financial Liabilities = Net Worth
The following sections tell you how to determine those numbers.
Calculation of financial assets:
A financial asset is real money or an investment you can convert to hard dollars
that you can use to buy things now or in the future.
Financial assets generally include the money you have in bank accounts,
stocks, bonds, and mutual fund accounts.
Money that you have in retirement accounts (including those
with your employer) and the value of any businesses or real estate that you
own are also included.
I generally recommend that you exclude your personal residence when figuring
your financial assets. Include your home only if you expect to someday
sell it or otherwise live off the money you now have tied up in it (perhaps by
taking out a reverse mortgage). If you plan on someday tapping into the equity
(the difference between the market value and any debt owed on the property),
add that portion of the equity that you expect to use to your list of assets.
Assets can also include your future expected Social Security benefits and
pension payments (if your employer has such a plan). These assets are usually
quoted in dollars per month rather than in a lump sum value. I explain in
a moment how to account for these monthly benefits when tallying your
financial assets.
Consumer items — such as your car, clothing, stereo, and wine collection —
do not count as financial assets. I know that adding these things to your
assets makes your assets look larger (and some financial software packages
and publications encourage you to list these items as assets), but you can’t
live off them unless you sell them.
Calculation of financial liabilities:
To arrive at your financial net worth, you must subtract your financial liabilities
from your assets. Liabilities include loans and debts outstanding, such as
credit card and auto loan debts. When figuring your liabilities, include money
you borrowed from family and friends — unless you’re not gonna pay it back!
Include mortgage debt on your home as a liability only if you include the
value of your home in your asset list. Be sure to also include debt owed on
other real estate — no matter what (because you counted the value of investment
real estate as an asset).
The table below provides a place for you to figure your financial assets. Go ahead
and write in the spaces provided, unless you plan to lend this book to someone
and you don’t want to put your money situation on display.
Your Financial Assets
Account Value
Savings and investment accounts
(including retirement accounts):
Example: Bank savings account $5,000
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
Total = $_________
Benefits earned that pay a monthly retirement income:
Employer’s pensions $_________ / month
Social Security $_________ / month
× 240*
Total = $_________
Total Financial Assets (add the two totals) = $_________
-----------------------------------------------------------------------------------------------------------------
* To convert benefits that will be paid to you monthly into a total dollar amount, and for purposes of simplification, assume that you will spend 20 years in retirement. (Ah, think of two decades of lollygagging around — vacationing, harassing the kids, spoiling the grandkids, starting another career, or maybe just living off the fat of the land.) As a shortcut, multiply the benefits that you’ll collect monthly in retirement by 240 (12 months per year times 20 years). Inflation may reduce the value of your employer’s pension if it doesn’t contain a cost-of-living increase each year in the same way that Social Security does.
------------------------------------------------------------------------------------------------------------------
Now comes the potentially depressing part — figuring out your debts and loans
Your Financial Liabilities
Loan Balance
Example: Gouge ’Em Bank Credit Card $4,000
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
Total Financial Liabilities = $_________
Now you can subtract your liabilities from your assets to figure your net worth in Table below
Your Net Worth
Find Write It Here
Total Financial Assets $_________
Total Financial Liabilities – $_________
Net Worth = $_________
What to know from net worth results:
Your net worth is important and useful only to you and your unique situation
and goals. What seems like a lot of money to a person with a simple lifestyle
may seem like a pittance to a person with high expectations and a desire for
an opulent lifestyle.
If your net worth (excluding expected monthly retirement benefits such as those
from Social Security and pensions) is negative or less than half your annual
income, take notice. You have lots of company — in fact, you’re with the
majority of Americans. If you’re in your 20s and you’re just starting to work,
a low net worth is less concerning.
Getting rid of your debts — the highest-interest ones first — is the most
important thing. Then you need to build a safety reserve equal to three to six
months of living expenses. You should definitely find out more about getting
out of debt, reducing your spending, and developing tax-wise ways to save
and invest your future earnings.
Your net worth indicates your capacity to accomplish major financial goals,
such as buying a home, retiring, and withstanding unexpected expenses or
loss of income.
Your financial net worth has absolutely, positively no relationship to your
worth as a human being. This is not a test. You don’t have to compare your
number with your neighbor’s. Financial net worth is not the scorecard of life.
Your net worth is your financial assets minus your financial liabilities:
Financial Assets – Financial Liabilities = Net Worth
The following sections tell you how to determine those numbers.
Calculation of financial assets:
A financial asset is real money or an investment you can convert to hard dollars
that you can use to buy things now or in the future.
Financial assets generally include the money you have in bank accounts,
stocks, bonds, and mutual fund accounts.
Money that you have in retirement accounts (including those
with your employer) and the value of any businesses or real estate that you
own are also included.
I generally recommend that you exclude your personal residence when figuring
your financial assets. Include your home only if you expect to someday
sell it or otherwise live off the money you now have tied up in it (perhaps by
taking out a reverse mortgage). If you plan on someday tapping into the equity
(the difference between the market value and any debt owed on the property),
add that portion of the equity that you expect to use to your list of assets.
Assets can also include your future expected Social Security benefits and
pension payments (if your employer has such a plan). These assets are usually
quoted in dollars per month rather than in a lump sum value. I explain in
a moment how to account for these monthly benefits when tallying your
financial assets.
Consumer items — such as your car, clothing, stereo, and wine collection —
do not count as financial assets. I know that adding these things to your
assets makes your assets look larger (and some financial software packages
and publications encourage you to list these items as assets), but you can’t
live off them unless you sell them.
Calculation of financial liabilities:
To arrive at your financial net worth, you must subtract your financial liabilities
from your assets. Liabilities include loans and debts outstanding, such as
credit card and auto loan debts. When figuring your liabilities, include money
you borrowed from family and friends — unless you’re not gonna pay it back!
Include mortgage debt on your home as a liability only if you include the
value of your home in your asset list. Be sure to also include debt owed on
other real estate — no matter what (because you counted the value of investment
real estate as an asset).
The table below provides a place for you to figure your financial assets. Go ahead
and write in the spaces provided, unless you plan to lend this book to someone
and you don’t want to put your money situation on display.
Your Financial Assets
Account Value
Savings and investment accounts
(including retirement accounts):
Example: Bank savings account $5,000
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
Total = $_________
Benefits earned that pay a monthly retirement income:
Employer’s pensions $_________ / month
Social Security $_________ / month
× 240*
Total = $_________
Total Financial Assets (add the two totals) = $_________
-----------------------------------------------------------------------------------------------------------------
* To convert benefits that will be paid to you monthly into a total dollar amount, and for purposes of simplification, assume that you will spend 20 years in retirement. (Ah, think of two decades of lollygagging around — vacationing, harassing the kids, spoiling the grandkids, starting another career, or maybe just living off the fat of the land.) As a shortcut, multiply the benefits that you’ll collect monthly in retirement by 240 (12 months per year times 20 years). Inflation may reduce the value of your employer’s pension if it doesn’t contain a cost-of-living increase each year in the same way that Social Security does.
------------------------------------------------------------------------------------------------------------------
Now comes the potentially depressing part — figuring out your debts and loans
Your Financial Liabilities
Loan Balance
Example: Gouge ’Em Bank Credit Card $4,000
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
________________________________ $_________
Total Financial Liabilities = $_________
Now you can subtract your liabilities from your assets to figure your net worth in Table below
Your Net Worth
Find Write It Here
Total Financial Assets $_________
Total Financial Liabilities – $_________
Net Worth = $_________
What to know from net worth results:
Your net worth is important and useful only to you and your unique situation
and goals. What seems like a lot of money to a person with a simple lifestyle
may seem like a pittance to a person with high expectations and a desire for
an opulent lifestyle.
If your net worth (excluding expected monthly retirement benefits such as those
from Social Security and pensions) is negative or less than half your annual
income, take notice. You have lots of company — in fact, you’re with the
majority of Americans. If you’re in your 20s and you’re just starting to work,
a low net worth is less concerning.
Getting rid of your debts — the highest-interest ones first — is the most
important thing. Then you need to build a safety reserve equal to three to six
months of living expenses. You should definitely find out more about getting
out of debt, reducing your spending, and developing tax-wise ways to save
and invest your future earnings.
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