The start of a new year is a good time to answer an elementary question: “How am I doing?” Or, in slightly more technical terms, “What’s my net worth?”
Why your net worth matters
Calculating your net worth is not just an academic exercise. It tells you how your assets are allocated. Are you in the risky position of having all your eggs in one basket?
Your net worth also shows what assets you have to meet day-to-day cash needs. It plays a role in whether you can get loans, it is vital in retirement planning, and it gives you other valuable information for decision-making.
Knowing your net worth also lets you estimate the taxes on your estate and plan accordingly. It is the first step in making sure your family’s grief at your death is not compounded by a huge bill from the IRS.
What net worth means
Your net worth is the value of your assets minus your debts. It is what would be left if you sold everything you own and paid off everything you owe.
The easiest way to calculate it is with a personal finance program or spreadsheet. You can do it with a calculator, but it takes a lot longer, and you’ll have to recalculate by hand every time something changes.
How to value your assets
Start by gathering the most recent statements from your bank, stockbroker, mutual funds, insurance company and retirement plan. If you have term insurance, use the death benefit as the asset. You may have to ask your employer for your retirement plan information.
Determine the fair market value of the notes and property you own, and be conservative.
- Partnerships and closely held corporations. You may need a professional appraisal to value these interests. If you don’t want to spend the several thousand dollars that costs, make an educated guess, again on the conservative side. Inflating your assets is pointless and will only hurt you.
- Collectibles. Have them appraised or check catalogs for their value. Their value is what you could get if you sold them, not what you paid.
- Jewelry. Jewelry appraisals are notoriously inflated for insurance purposes, so cut any such valuation by at least a third to a half.
- Household goods and personal property. Apart from high-ticket items like jewelry, collectibles, cars, airplanes and boats, these are worth very little, no matter what you or Aunt Tillie think. Banks routinely ignore loan applicants’ valuations of household goods over $10,000.
A free way to find what jewelry is really worth
When I was shopping for an engagement ring, I borrowed the one I wanted from the salesman and took it around to the fanciest jewelry stores in Washington, D.C. I asked each one what they would pay me for it. That confirmed I was getting a good deal.
You can do the same with jewelry or collectibles to find their wholesale value. Be careful not to ask “What is it worth?” because you may get a number off the top of someone’s head. Give the impression that you want to sell (without lying, of course; I simply asked what they would pay me for it), and you’ll get a precise, conservative answer. What’s more, this “appraisal” is free.
Add up what you owe and do the math
Now total how much you owe. Add up the balances on all your outstanding debts: mortgages, other loans, credit card balances, car loans, other installment loans, recurring debts such as estimated taxes, and anything else you make payments on.
Then list your assets in one column and your liabilities in another. Subtract total liabilities from total assets, and you have your net worth.
Calculating your net worth is a very useful exercise, and you should do it at least once a year. Watching it grow is great fun, too.
