The basic definition of Net Worth is:
NET WORTH equals ASSETS minus LIABILITIES
To calculate my Personal Net Worth, I use the following approach.
1. Determine value of all financial accounts, and everything else I own. I usually use conservative estimates of value for assets when the value is not quick or easy to determine. This helps to ensure a realistic final value for Net Worth. For example, for a primary residence (house, townhouse, condo, etc) begin with the estimated value (assessed value, appraisal, whatever you think is realistic). Then deduct 6% for realtor commission when you need to sell, and then deduct another 10% to be conservative. So a house worth $100,000 would be valued as follows:
100,000 – 6,000 (6%) – 10,000 (10%) = 84,000 estimated value of this asset
2. Perform the same calculation for any second homes, such as vacation homes.
3. Use the same approach for vehicles except only deduct the 10% conservative factor, not the 6% we assumed for realtor commission when sold. The beginning number for a vehicle is the trade-in value from Edmunds or Kelley Blue Book. Most people trade in their vehicles, but if you alway sell yourself, then adjust accordingly.
6,000 (trade in value) – 600 (10%) = 5,400 estimated value of this asset
4. Repeat above steps for all assets that you can not easily determine an exact value.
5. Add in all assets that can be accurately valued. These include cash, stocks, mutual funds, bonds, 401k, IRA, savings and checking accounts, Certificates of Deposit (CDs), etc.
Here is a checklist of assets you can use:
- Interest-earning assets held at financial institutions
- Passbook savings account
- Money market deposit accounts
- Certificate of deposit
- Interest-earning checking accounts
- Other interest-earning assets
- U.S. Government securities
- Municipal or corporate bonds
- Stocks and mutual fund shares
- Rental property
- Mortgages held for sale of real estate
- Amount due from sale of business or property
- Regular checking accounts
- U.S. savings bonds
- Home ownership
- Vacation homes and other real estate
- IRA and Keogh accounts
- 401K and thrift savings plans
- Motor vehicles
- Other financial assets
6. Add up all your liabilities. This category includes mortgages, car loans, student loans, credit cards, and home equity loans.
Here is a checklist of liabilities you can use:
- Margin and broker accounts
- Mortgages on own home
- Mortgages on rental property
- Mortgages on other homes or real estate
- Home equity loans
- Debt on business or profession
- Vehicle loans
- Credit card and store bills
- Doctor, dentist, hospital, and nursing home bills
- Loans from individuals
- Loans from financial institutions
- Educational loans
- Other unsecured liabilities
7. Perform calculation ASSETS minus LIABILITIES. The result equals NET WORTH.
Now you have determined your own estimate of Personal Net Worth. Using this as a baseline, you can monitor your progress in the future to see if you net worth increases or decreases over time. Perhaps you calculate it monthly, quarterly, or yearly.
For some ideas on how to increase your Personal Net Worth, here is a list of some helpful and even funny books:
Hopefully by the end of next year you will see it increase. Good luck, I hope this helps.
Using the information above, I created an Automatic Net Worth Calculator if you prefer to do it the easy way!
Please enjoy and let me know if you have any problems or questions.