How to calculate your net worth

Three steps to finding your current net worth and the ideal starting point for big-picture financial planning

Christine Benz 19 July, 2019 | 1:48AM
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Mapping and measurement tools

I can still visualise the passbook that accompanied my first savings account--navy faux leather with our local bank's logo etched in gold. I remember the thrill of writing in the $5 interest payment I earned on my first $100, and the pain (albeit short-lived) of withdrawing $79 to pay for the bike I had researched intensively - a metallic blue Raleigh three-speed. (In hindsight, that choice smacks suspiciously of the influence of my nonconformist dad; all of the other girls at my school rode sky-blue Schwinn Breezes.) I recall strategising about how I could build my balance back up to $105 or beyond.

Passbook savings accounts are mostly all long gone, along with 5 per cent interest rates and English-made bikes for $79. And my financial life is more complicated, too: My husband and I have workplace savings plans, retirement accounts, and taxable accounts, as well as two health savings accounts--one for saving and one for investments. There have been home loans, home equity loans, and one car loan, too. In contrast with my fifth-grade self, I can no longer tell you--to the penny--how much money I have to my name on any given day.

Nor is that a worthy goal: Life is way too short to spend it in Ebeneezer Scrooge mode, and if you have money invested in stocks, you're apt to find that your net worth fluctuates a bit each and every day, often for no apparent reason. The more you have invested, the more these dollar amount fluctuations can look like something to worry about, even though they probably aren't.

An occassional checkup can keep you in good financial health

Yet conducting very occasional checks on your net worth--taking stock of your current assets minus liabilities--can yield valuable intelligence about your financial health, or that of your household/family. It can make plain whether servicing your debt is swamping your ability to save and provide an assessment of how you're doing on that mother of all financial tasks: replacing your human capital with financial capital. It can help you see if your assets are overly concentrated in a handful of assets--like your house or employer stock--or is well diversified across financial, real estate, and other asset types. Crafting a net worth statement is the ideal starting point for determining your household's big-picture financial priorities.

We've created a Net Worth Worksheet to assist you in this job; you'll need to print it to use it. Alternatively, you can create your own net worth statement in a spreadsheet. If you save your net worth statement--either a printout or an electronic document, be sure to keep it safe, either in a locked file drawer or by using a password-protected spreadsheet. Here are the key steps to take to document and analyse your net worth.

Step 1: Document your assets.

Begin to take stock of your net worth by gathering up your most recent investment statements or going online to retrieve your current account balances. Note that for some accounts, such as your bank account or retirement accounts featuring publicly traded securities, you'll be able to get a very current, very specific read on what those assets are worth. For other assets, such as the value of your home and car, you'll need to do a bit of educated guessing.

Find the following amounts:

  • Cash account balances--checking account and savings account
  • Retirement account balances
  • Life insurance policy face values
  • Current market value of home (be realistic! Inflation is often a problem when we self-assess our home's value)
  • An estimate of the current market value of other assets, including cars, jewellery, artwork, etc. (again, be realistic; tangible property isn't often worth what we think it is)
  • Any other assets that have financial worth

Step 2: Document your liabilities.

On the other side of the ledger, record any outstanding debts that you owe, including the following:

  • Mortgage loan balance
  • Home equity loan, home equity line of credit, reverse mortgage (only document if you currently carry a balance)
  • Student loan
  • Credit card debt
  • Car loan
  • Any other debt

Step 3: Calculate and analyse net worth.

Armed with total assets and liabilities, you can then calculate your net worth by subtracting the smaller number from the larger. Armed with this number, consider the following questions:

  • Is your net worth in the red or just barely positive? If so, you've got some work to do; we'll discuss this in detail next time
  • Is your net worth exquisitely positive? If so, don't let the "wealth effect" go to your head. Not only has the economy been strong and unemployment low, but the stock market has been on an extended tear, plumping up the net worth of anyone who holds stocks or stock funds in their portfolios. To help put a check on your spending, consider how wealthy you would feel if your portfolio lost 10 per cent, 20 per cent, or even more. (Such losses have been commonplace in stock market history; in the most recent downturn, 2007-2009, stocks lost 56 per cent of their value from peak to trough.)
  • How does your net worth compare with what it was at this time last year?
  • How does your current debt load compare with what it was a year ago?
  • Does any one financial asset consume a disproportionate share of your net worth? If you have a lot staked in a broad stock market or bond market mutual fund or ETF, that's no cause for concern. But heavy concentrations in residential real estate, employer stock, or other single positions can wreak havoc on a plan; they're particularly risky if they're not very liquid, such as residential real estate.
  • Are all of your assets adequately insured? That means physical assets like your home and car, of course, as well as your human capital, which you can insure with disability and life insurance.
  • If you're still working, do you have enough assets in place in your taxable accounts to cover your living expenses for six months or more?
  • If you're retired, do you have enough assets in highly liquid investments to cover expenses for two years as well as any emergencies or home and car repairs?
  • If you're getting close to retirement, is your current net worth on track to supply you with the living expenses you need, in addition to whatever you'll receive from a pension?

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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