Using Your Net Worth to Keep Score
Your net worth is a simple but important calculation – it’s everything you own, minus everything you owe. Your net worth (or balance sheet) is a snapshot in time. Your net worth today might be a little more or less than your net worth tomorrow depending on the amount in your checking account or the value of your stock portfolio.
How to Create a Net Worth Statement
The easiest way to create a net worth statement is to make a list of all your assets and how much they are worth today. List your bank accounts, investment accounts, life insurance cash values and your house.
Not sure how much your house is worth? Try looking at the Real Market Value of your home on your property tax statement. This is different from, and usually higher than, the taxable assessed value. The Real Market Value typically undervalues your home, especially in a rising market. You can also look up the value of your home on Zillow. Zillow usually overestimates the value of your home. If you average the Zillow value and the tax statement’s Real Market Value you’ll probably come pretty close.
Unless you have a professionally appraised collection of art, jewelry or other valuables, I generally don’t include those in a net worth statement. Nor do I include home furnishings and “stuff.” We all have “stuff” but it’s not worth much more than we can sell it for at a yard sale.
Likewise, unless you have a professional valuation for your business I generally don’t include that. Most small business owners vastly overestimate what a non-related purchaser will actually pay for their business.
Now that you’ve totaled up your assets, you need to add up your liabilities. This includes your mortgage, car loans, credit cards and student loans. If you owe money to the IRS or a relative you’ll include that as well.
Your net worth is your assets minus your liabilities. That wasn’t so hard, was it?
Why is your net worth important?
One key measure of your financial health is increasing your net worth over time. You might actually start out with a negative net worth if you have a mortgage and lots of student loans. Focus on what you can control. Pay down debt. Save and invest.
How often should you update your net worth?
How often should you update your net worth? Though online apps can give you a net worth almost instantly, I recommend updating it only once per year. Go old school and write it down on a piece of paper. Keep a running score. Every year pull out that piece of paper and write down the date and your new net worth. Did it go up or down? Why?
Your net worth might not go up every year, especially if there’s been a downturn in the stock market or the housing market. But by keeping score and focusing on what you can control, your net worth is likely to increase over time. It’s fun to watch that number get bigger!
If you’d like to start a regular practice of calculating your net worth and become intentional about growing it, you can read more about our financial planning process here, or schedule a consultation with one of our advisors.