It’s day 6 already! I know you are probably wondering when we will create your budget. In due time, in due time. There are things I want you to know with regard to finance, before you create your budget. Knowing your net worth is essential, but knowing how to determine your net worth is vital. Essentially, your net worth is the value of what you own, minus what you owe. In formula form it would look like this: assets – liabilities = net worth. Bankrate.com has an online calculator to help you determine your current net worth; and it also estimates how your net worth can grow over grow or decline over the next 10 years.
If you would like to calculate it manually and keep it on something as simple as an excel spreadsheet then follow these steps below:
- The amount of money in your checking and savings accounts
- The amount in your brokerage and retirement accounts
- The estimated value of the items in your home
- The estimated value of your paid off automobiles
- Cash value of your life insurance policies
- Any investment properties
Some finance experts say that you should include the market value of your home, but personally I feel that if your home is not paid for, it is not considered an asset. It is totally up to you if you want to include that.
Now subtract any debt’s that you owe. If you are not sure of your debt’s then this would be a good time to order your credit report since all of your debts are listed there. Here is a list of common liabilities:
- Home loans, such as, your mortgage, home equity loans or lines of credit
- Auto loan or lease
- Credit cards
- Student loans
- Other loans, such as, bank loans or loans from your 401(k)
This will give you your net worth. Calculate your number on an annual basis. This will show you where you need to make changes to your budget, such as, maybe increasing your 401(k) contribution, to be where you want to be at retirement. If there is a need for an increase you can add that to your budget for the year. Calculating your net worth may motivate you to save more, or decrease debt, if your numbers are not where you want them to be, or if your numbers are good then it may even motivate you to continue on at the same pace despite any tough sacrifices that you are making to do so.
When it is time to review your annual numbers, remember that net worth only offers a snapshot of a moving target. Some of your assets, such as, your home and stocks may change in value on a regular basis no matter what you do. Those changes are not necessarily indicative of a need to take action.
Your assignment for today is to calculate your net worth.