Calculating Your Net Worth
People have a lot of New Year’s Day traditions. My Mom called me to make sure I ate my black-eyed peas, which are supposed to bring luck. If you live in Italy, you might eat lentils for the same reason. In Brazil, you might wear white for good luck and peace.
But one of my personal traditions — dating back probably 20 years — is to calculate my net worth on New Year’s Day. I do so in an Excel spreadsheet in which I have all of the various financial categories separated out. I can look back over time and get a clear picture of performance over time.
Today I want to talk about that process.
Assets versus liabilities…
At a high level, calculating your net worth involves adding up all of your assets and subtracting all of your liabilities.
I break my accounts down into retirement accounts — such as my 401K, my Individual Retirement Account (IRA), and my Roth IRA — and non-retirement accounts. I have all of my accounts linked together at Fidelity, and it makes the calculation much easier than in my pre-Fidelity days.
For both of these categories, I first separate out the cash equivalents. This category includes things like certificates of deposit, checking and savings accounts, Treasury bills, money market accounts, and cash.
Then I tabulate the investments. This category includes stocks, bonds, and mutual funds. Although not applicable to me, you might also have annuities, pensions, and a cash value for your life insurance.
Finally, I look at tangible assets. One category is real property, like my house and a few acres I own. The other is personal property. I don’t get too granular on this, but you can include things like vehicles, jewelry, and collectibles.
I add all of these categories to get the total value of all my assets.
Then I add up my liabilities, which in my case is just a mortgage. But you may have credit card balances, personal loans, car loans, and student loans.
Subtract your liabilities from your assets, and hopefully that’s a nice positive number.
I then begin analyzing the numbers versus previous years. Hopefully your liabilities are decreasing and your assets are increasing. If not, this is a good time to identify areas in which you need to make a change.
I compare the change in net worth to previous years. What went right? Where did things go wrong?
One area I always focus on is the ratio of my retirement accounts to my non-retirement accounts. I know people that have fat retirement accounts, but not much outside of their retirement accounts. You want to have a balance so you have disposable cash in the event of an emergency.
After adding everything up and analyzing the accounts, I make a few notes on what needs to change for the upcoming year.
But it all starts with an accurate accounting of net worth on New Year’s Day.
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