What is Your Net Worth or Net Assets?
It is important when you begin your journey of reaching your money goals, that you keep an eye on the big picture. Identifying and tracking your net worth is a great way to accomplish this. As a disclaimer although we are putting a calculation and a numerical value to your personal net worth, this is only in relation to your current financial picture.
Your True Worth Doesn’t Come from Money
Your true worth and true value is way too abundant to calculate, it is quite immeasurable. So keep that in mind as you go down the path of determining your net worth. For this reason, instead of calling it net worth, I prefer to use the term net assets. Because your true worth does not come from money or what you own.
The Net Assets Formula
So what are net assets then? Assessing your net assets is a way to view your assets after deducting your liabilities. This then paints a clear picture of your “worth” in numerical terms only. The actual formula for calculating your net assets is fairly simple. You just take the total combined value of all your assets minus the total combined liabilities or loans you owe.
Sounds pretty simple right?
Let’s go over assets first. Assets are items of value that you own. Although a fairly simple concept, this is a monstrously broad category because you could own anything from a $500,000 piece of real estate to a $250,000 investment account to a $20 toaster with a whole plot-line of items in between. So what then should you include in your assets so that you can calculate the combined asset total?
There are a few different ways you can look at this, and much of it really depends on your own personal preference and how down to the nitty gritty you want to get with calculating assets. To include the gravy boat or not? ‘Tis is the question.
The “Must Have” Assets
I believe the following absolutely should go in the net assets. These are the must haves.
The must haves to be included in the assets are any kind of investment accounts that you currently have and the current value of those accounts. Any kind of retirement accounts and the current value for each of those. So determining most of these asset values is pretty straightforward. You will just add the asset value, aka the current balance on your recent statement, for accounts such as these.
Present Day Value Assets
If you are ever so fortunate enough to still have a pension, that one is a little more vague. For this type of account, you will use the present value of the pension plan. This may be on your statement; or if it is not available, there are online calculators that will give you an estimate of this which you can use.
Present day values are typically the amounts on any accounts you could cash out on if you woke up this morning and decided to fly to Tahiti or some other beautiful tropical island, because today was going to be the first day for your early retirement. Hey we can all dream right? Think of this as the amount you could get your hands on right away if needed. It is what is available to you today, not what you are projected to have available in the future.
Count All Money You Own
Some more must haves for assets are balances you have in any other accounts including money market accounts, certificate of deposits, savings accounts and so on. Also don’t forget if you own a whole life policy with a present cash value, this is also an asset you will want to include. You will also want to include any rare coins, gold, silver or even cash you have hidden under that old mattress, don’t worry your secret’s safe with me!
So the concept is if you own money, no matter what kind of account it is (or where it is buried in your backyard), it is an asset that should be included. If it is a checking account, you will need to make a judgment call. If you consistently keep extra cash in your checking, then maybe include. However most peoples’ funds in their checking accounts are allocated towards paying bills and spending. In other words, blink and it’s gone. So I would say exclude checking as a general guideline, but you know your situation the best so sometimes it will make sense to include.
Don’t Forget Your Properties
Other must have assets include your home if you are a home owner, along with the estimated current value of your home. Also include any other real estate you own in assets including the corresponding values of those properties. If you do not know the estimated market value of your home or property, you can do a quick check on Zillow.com to get your zestimate. Just plug in the address or addresses on the site, and it will give you an estimated value of the property that you can plug in.
Another asset to include is the value of your business if you are self-employed.
The “Maybe” Assets
Now that we’ve covered the must haves, let’s review the maybe assets. Maybes are options you can decide to include or not to include depending on what you like best. One maybe is your vehicles. You can certainly include your vehicles in your assets. However, remember that cars are depreciating assets. Which means they are continually going down in the value. So if you buy a new truck off the showroom floor and then look up the value the day you bought it and use that number, that is correct. However, if you don’t update that value for the next several years, that is problematic because that value has dropped rather significantly in that amount of time. This same concept holds true for boats, RVs, motorcycles, ATVs, trailers, etc. So include if you’d like to, but just be sure to update these values regularly to account for them being depreciating assets.
Other items in the maybe column include jewels, furniture, collectibles, art, tools, or anything else of substantial value. You can keep drilling this down as far as you want to go, but I would personally view this from a big picture lens.
Liabilities are the loans or debts you owe others. So your total combined liabilities are all of your debts and loans added together. So go through and identify who you owe and your current balances on your loans and credit cards. Then add all of your debt together.
Is It As Good As It Appears?
The reason factoring liabilities is so important is because you may see someone living in a beautiful mansion or driving a luxury vehicle and immediately think, wow they are wealthy or they have a lot of net worth. However if the beautiful mansion has a current appraised value of a million dollars and the occupant has mortgage loans they owe on the mansion of 1.2 million dollars, things suddenly don’t look quite as beautiful as they did at first glance. This is because the owners are currently $200,000 in the hole on that house.
Same goes for cars. If the value of a vehicle is $35,000 and you owe $45,000, you have $10,000 negative equity; or you are what is commonly referred to as upside down on that vehicle. Remember cars are depreciating assets so this can happen quite frequently to people. For the most part, real estate is an appreciating asset or an asset that will get more valuable over time. But we don’t control the markets, so that is not a given for every person in every circumstance.
Do The Math
Now that you have your total assets and your total liabilities, it’s time to calculate your total net assets. This is just your total assets minus your total liabilities. So if you have $300,000 in assets and you owe $170,000 in liabilities, your net assets are $130,000.
Is It a Positive or Negative Number?
You are either going to have a positive number or a negative number for your net assets. If you have a negative number, it just means you need to start building up assets through savings or other means or reducing debt…or both. Having a budget will dramatically help you achieve this so listen to the Mind Your Money podcast Budget Doesn’t Have to Be a B Word or read the blog for clear guidance on how to make this happen. Don’t get discouraged though, because you can absolutely bring that number positive and keep growing from there.
Why Is Net Assets Important?
So why is net assets so important? This number gives you the true value of your monetary worth at any given time. This takes us out of the mindset that just owning or possessing things is your wealth. Many times on larger assets that are secured by a loan, you do not really own that asset until there is no longer a loan on that asset such as mortgages. Even though it feels like you own it, the lender ultimately owns it until the loan is paid in full.
Calculating net assets gives us that little swift reality kick to the butt on what’s going on with the big picture of our money. Is it a beautiful mansion like we think at first glance or is it a debt loaded money pit after you peel back the blinders? It looks nice but is it really?
Use For Motivation
On a more positive note, calculating and tracking your net assets can be a highly motivational tool! It can help you set goals and make proper adjustments to your budget. It can also keep you motivated when there may not be a whole lot of cash flow left over at the end of the month, but then you see your net assets are increasing which helps you keep your eye on the goal.
Let’s use the goal example of reducing debt. Going through the grind of putting all your extra money towards debt and sacrificing things you wish you could buy can start to feel like a downright downer after awhile. But on the flip side if you are tracking your net assets and seeing this number substantially grow because of your own hard work, determination and temporary sacrifice, well now it feels pretty good all of a sudden.
So reviewing and tracking net assets over time can be incredible for boosting your mindset, giving you that perseverance when you need it, and ultimately reaching your money goals.
As far as how you want to track this, you have many options. You can do yourself through a program such as Excel or you can use a tool already designed and available for this purpose online or with an app on your phone. A great app out there which is designed for this purpose is called Personal Capital.
That’s net assets or net worth. Easy peasy. I really encourage you to understand your net assets, it will absolutely help you with long term goal achievement!
What Would Benjamin Say?
Benjamin Franklin had this to say about the topic of net assets “Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones.” Benjamin wasn’t known for sugar coating, and sometimes we need a dose of that too to help keep us on track and motivated. Net worth does this for us.
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