The Fundamentals of Net Worth

What is net worth?

Net worth is one of the most important personal finance numbers.  It’s a measure of accumulated and retained monetary value over your lifetime. You can also track net worth as an individual or combined as a household.  It is one of the most common and powerful indicators about how well you manage your personal finances over time

Net worth is commonly defined as Assets less Liabilities. In simplest terms, add up everything you own and subtract everything you owe. A positive net worth indicates that you have more than you borrow and a negative net worth mean you’re indebted. A bigger positive net worth is always better, but how big it should be is all relative to your own personal financial goals.

A look into what you Own

To get started, let’s review what makes up your personal assets:

  • Liquid Assets: these are assets that are currently or can be converted to cash quickly. This include you cash on hand, bank savings & checking, and money market accounts.
  • Real Property: these are personal homes, land, and buildings. These are commonly referred to as fixed assets, meaning they are immobile and tend to retain or even appreciate in value over time.
  • Personal Property: these are all other personal or household belongings. These assets are easily transferable and can include cars, jewelry, artwork, and other collectibles.
  • Investments: these are strategic assets that may not be easily transferable to cash and are intended to increase in value over time. Examples include stocks, 401ks, IRAs, and personal loan receivables.
  • Future Assets: these are special considerations for assets that you may not be fully entitled to today, but expect to retain a portion of the value in the future. Examples could be employer-sponsored retirement funds that are not vested, deposits or trust funds. These should not be included in your net worth, but are important indicators of future net worth.

How to Value what you own

Valuing assets may seem straight-forward, but asset values are constantly changing based on inflation and market conditions. For personal finance net worth, you should always err on the side of being conservative while still assessing your assets at the current fair value.

For home value as an example, the fair value is very likely not be the original price you paid unless you just acquired your home in the last year. Luckily, there are many tools available to get relevant updates on your property’s fair value. I personally use Zillow to periodically check the current fair value estimate. All you need is to log into the site, input your address, and review the Zestimate – which is Zillow’s home valuation assessment based on their extensive database of recent home sales in your area.

Ok, now what about home renovations? Home valuation sites will not have insight into major home improvements, such as replacing the master bathroom or a total kitchen remodel. If you decide to include these in your net worth valuation, do your research on comparable homes that have done upgrades or the average market return for these upgrades. Most home renovations do not see a full return on those investments – you might only get 50% of the value back out when you go to sell. Again – when in doubt, err on the side of conservative estimates or do not include in your valuation.

For car value, the fair value is also constantly changing as well and tends to decreases over time. I personally use Kelley Blue Book to evaluate the current expected value of my car. I recommend using the lower end of their recommend value to be conservative.

For other personal property, this may be a bit of a grey area in how you decide to define your personal net worth. Personal property values can be somewhat subjective and you may have an inflated sense for what it’s worth. When it comes to tracking personal property for net worth purposes, less is more. Before you add include personal property in your net worth, here are some questions you should ask yourself:

  • Is the asset value currently greater than $2,000? If the answer is no, you should exclude. The amount is relative arbitrary, you can decide that value is too high or too low, but it’s important to be consistent
  • Is there a market for re-selling these assets? If the answer is no or you’re unsure, do not include until you’ve done more research.
  • Is it likely these assets will lose significant value over time? If the answer is yes, you should exclude. Whether it’s new technology, changes in fashion trends or market trends, if there is a high likelihood that the value could change dramatically or become obsolete in the near team it’s not worth tracking.
  • Does the item contain sentimental value? If the answer is yes, you should exclude. An example is your wedding ring or a family heirloom. Although it does have value, it might have an inflated value to you because of your personal history. If you’re unlikely to sell the asset when time’s are tough, then you should exclude.

For my own net worth calculation, I only track car values and collectibles when it comes to personal property. My Hubs (a.k.a. Mr. Mula) has a couple pinball machines that we’ve discussed selling in the event we downsize. These are assets that are worth more than $2,000 and they tend to sell quickly if their are fairly priced and don’t tend to lose value over time so long as they are properly maintained. I have not included values associated with any other personal property or home renovations.

For all other assets and investments, you should be able to find the fair value or current market value for your assets, such a through your bank, investment or retirement provider. However, you should only track those assets where you are fully vested – meaning you are entitled to those assets today.

Vesting is when you are not eligible to redeem or to the full value of the asset until you achieved a certain criteria. An example are employer matched 401k benefits, which require you to work for one, two or sometimes up to five years to be fully eligible to receive these benefits. If you have certain assets that are not vested, these are important to track, but as memo items below your net worth. The reason to track these balances is they can significantly influence life decisions and also be good indicators for your long-term net worth planning.

Other future assets that you may consider tracking as memo items below your net worth calculation are lease deposits, stock option incentives, trust funds or other expected inheritances. Again, do not include in your net worth calculation but it’s always best to have a pulse on these future assets.

A look into what you Owe

Let’s review what makes up your personal liabilities:

  • Credit Cards: this represents that amount that you currently owe to credit card companies, which represent your credit purchases and any assessed interest accumulated to date.
  • Mortgages: this is the amount owed to the lender related to your home purchases.
  • Rent & Other Bills: these is the amount you owe for normal bills, such as utilities, rent, cable, and other service providers.
  • Student Loans: this is the amount owed to the lender related to your education costs.
  • Car Loans: this is the amount owned to the lender related to your vehicle.
  • Other Liabilities: it’s important to track all your borrowings, including if your co-worker lends you $5. Get in the habit of keeping yourself accountable, even if they are small dollars, as they often get overlooked.

How to Value what you owe

Valuing what you owe should be based on today’s fair value. For any loans and debt, you should include the values as the “payoff” amount before any future assessed interest. This information should be shared periodically and should be accessible to you at all times.

Taking the next steps

If you’re new to managing your personal finances and net worth, reading this article is a great first step to taking control of your financial future. Start keeping a running list of all that you own, and all that you owe. Open up your wallet and make a list of every credit card. Once you’ve consolidated the list, take the next steps by using a personal net worth calculator to begin measuring your net worth.

You’re never too young or too old to get started. If you’ve been keeping track of your net worth already – then stay tuned for more tips & tricks on how to stay organized and keep increasing your personal net worth month over month.

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