Measuring your financial success comes down to answering one question. Did you grow your net worth over the past quarter, year, or several years? This is the yardstick for measuring financial success and strictly how your financial performance should be graded.
How to Calculate Your Net Worth
The Calculation of Net worth is as follows: Assets less liabilities equals net worth. The calculation of net worth by my standards varies from how you would calculate it when applying for a mortgage.
My Method Of Calculating Net Worth
First, let’s start with what are your assets or better yet what I don’t consider an asset for your personal calculation of net worth. Do not include the value of your furniture, jewelry, clothing and other personal items. Do not include the value of your checking account nor the value of your recurring bills accounts that you set up under my cash flow system.
A Car is NOT An Asset!
With repairs, gasoline, and depreciation, a car is one of the largest drains on personal net worth. If you have a car loan, only list the value of the car net of the loan amount. So, if you have a $25,000 BWM per kbb.com, and you have a loan of $15,000, then the net asset value of the BMW is $10,000 for new worth purposes.
How To Handle A Car Lease
For a car lease, that is not underwater, exclude the car value as an asset and the lease payments as a liability. For a lease that is underwater, list the underwater amount as a liability only. If you lease a car and are over the mileage, list this amount as a liability. So, if you are 10,000 miles over the lease, and owe 25 cents a mile, you have a $2,500 liability.
What You Should Count As Your Assets
So, for assets, that just leaves you with a few categories: retirement savings accounts, such as 401k/457b, IRAs, and SEPs, accounts earmarked for college expenses such as a 529 plan, money in a brokerage account or savings account not earmarked for any of your recurring expenses or other bills.
Should Your Include The Equity In Your Home?
Thomas J. Stanley, Ph. D said in STOP ACTING RICH
“For many years, I defined net worth as the current value of all one’s household assets minus all of its liabilities. But things have changed. I now refer to this measure (assets less liabilites) as augmented net worth, or embellished net worth, or enhanced net worth, or even nominal net worth. Embellished net worth includes, for example, the equity in one’s home.”
Personally, my goal was to become a non-augmented or non-embellished millionaire. As I believe that you always need a roof over your head.
I will leave the choice to you. However, if you do include the equity of your home in your net worth calculation, make sure the market value it is based on a value from an independent source, such as zillow.com.
What You Should Count As Your Liabilities
Since we excluded your checking account and large and small bills accounts, you don’t need to list those bills as liabilities, as they are covered by the amounts in these accounts. You also do not have to list you credit card bill if you pay it off each month, and the amount to pay it off is going to come from these accounts. If you carry a credit card balance, list the outstanding balance of each card as a liability.
Include any loans for your home, home equity lines of credit, personal loans from family members, student loans, cars (if you didn’t use the net for asset value above), and any other debts.
What is Your Personal Net Worth?
By subtracting your true assets from your true liabilities, you now have your net worth. Positive or negative, this is your starting point to beginning to achieve your financial success. From this point forward, you must begin to “grow” your net worth by increasing your assets or by decreasing your liabilities.
Track The Changes in Your Net Worth
I recommend that you update your net worth at least quarterly and keep a running record in a spreadsheet. This will allow you to grade yourself on your short-term and long-term progress on how you are growing your net worth.
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