Have you ever sat down to calculate your net worth? Having an idea of your financial net worth and measuring the changes from year to year can be a good way of tracking your financial progress. You really can’t get to where you’re going if you don’t know where you are. A net worth statement is like a pointer that signals you when there is a problem. You really don’t need to attend a business school before you start learning about finance.
For most of us growing up was nothing to write home about when it comes to financial related matters. Our parents did not discuss about money at home over dinner neither did the school system taught us how to make, manage and multiply money. What most people know about money today was either picked up from a broke friend or through the school of hard knocks. Loads of people out there no nothing about money. All they’re interested in is spending it.
Knowing your financial statement/net worth as a person is a bit like a health check up. It gives you a clearer picture of where you stand. Doing a routine net worth evaluation twice a year can assist in determining loopholes and making future decisions. Calculating your personal net worth is very simple and does not require a high level of intelligence or a degree in accounting. All you need to do is simply compute the current value of your assets and deduct the value of your liabilities from it to reveal your personal net worth. Simply put, it is the difference between what you own (an asset) and what you owe (a liability).
A Refresher…
An asset is anything that puts money into your pocket.
A liability is anything that takes money out of your pocket.
Steps to Calculating Your Personal Net Worth
Assets: List your assets in order of liquidity (the ease with which you can convert them to cash).
Cash: Your latest bank statements, investments account statement and cash at hand will give you the value of your liquid investments.
Shares: For any share you’re holding in a company, calculate the most recent value per share to know the present worth of that particular equity. You can get prices on the Internet, in the news, through your stockbroker or the newspaper. The same process goes for your mutual funds, bonds and other levels of investment.
Cars: Immediately you buy a brand new car and drive it out of the lot, 10% of the value is gone. To get a reasonable estimate of how much your car is worth, look around and ask a car dealer for current price of the car you’re driving and then discount that price by 50% to get your estimated actual value.
Receivables: This is money people owe you and can be classified as an asset but you have to be very careful about it. Don’t over count your chickens before they are hatched. I kind of believe in money at hand but all the same you can include it.
Retirement Savings Account: Get the most recent statement from your retirement fund administrator.
Real Estate: You need a current valuation to be done by a real estate person for all the properties you own.
Business Concerns: Consult your auditors to prepare a balance sheet report which will reveal the true financial worth of your business. It’s actually a must for bigger companies to present their statement of account to the general public but if you are a small business owner or self employed, its better you get a qualified accountant to sort things out for you.
Liabilities: How much do you owe? Are you servicing any loan presently? List everything out and arrange it in the order in which they are repayable.
Mortgage: The house you live in is not an asset except you own it. Get your latest mortgage statement to reveal your current balance.
The Figures
Below is a fictional financial statement.
One of the key benefits of knowing your net worth is that it allows you to distinguish between spending on assets and liabilities. Spending money on assets that appreciates over time is far better than buying up liabilities that depreciate rapidly. What really matters is not how much money you make but how much money you keep. To join the fast track, you need to increase the rate at which money works for you so that you don’t end up spending bulk of your time slaving for money.
Are You on Track?
If you have not done it before, now is the best time to give it a shot. For others, when was the last time you carried out a health check on your financial life and how did you go about it? Feel free to contribute and share your experience in the comment box below.