Out with the old, in with the new: Calculate your net worth
In December and January, 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.
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.Skip to next paragraph
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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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.