Know Your (Net) Worth
Lori Z. Bahnmueller
Michigan Credit Union League - Your Money Matters
With tax time coming around you might be asking yourself "What's left for me?" It's a good question and finding the answer is easier than you might think.
Tax time is a good time to figure out your net worth. Your net worth is the total of all your assets minus the total of your liabilities. It's a good measure to use to figure out if you're keeping ahead of inflation and moving toward your goals. You also need to know your net worth if you plan on buying a house or applying for college financial aid.
Why do it now? Because right now you are receiving year-end statements from financial institutions and brokerages. These statements show your total value of investments. You also receive statements from your mortgage lender which shows the balance remaining on your mortgage and the interest you paid during the year. All of this type of information is needed to accurately figure your net worth.
Begin by taking a sheet of paper and folding it in half vertically. Mark the left column "Assets." This is all that you have or own right now. List your savings and checking accounts, money market accounts, certificate of deposits, bonds, annuities, life insurance (cash value), securities, home, pension, car(s), furnishings, jewelry and any money owed to you. Include any other investments you may have such as real estate or business interests. Use figures that are based on market value, meaning what your property would be worth today if you were to sell it.
Title the right hand column "Liabilities." This is what you owe others. List the balance due on your mortgage, taxes, debt (include any installment debt, such as loans), insurance premiums, credit card balances, charitable pledges and any other money you may owe to family or friends.
Add up each column and at the bottom subtract your total liabilities from your total assets. That number is your net worth.
So what do you do with that number now? Well, for starters if your assets are greater than your liabilities, you are saving more than you are spending. If not, it's time to do some budget crunching. Also keep a file on hand and place that piece of paper in it. Every year, figure your net worth to see how you're doing. Your net worth should increase if you are to move closer to your goals. If your net worth is decreasing over time, you need to take a closer look at your investments and figure out where and why you are losing value in your assets or why you have more liabilities, such as credit card debt.
Once you have at least two years of your net worth figures on file, you can figure out if you are staying ahead of inflation. You simply figure out how much your net worth increased by percentage and compare that to the rate of inflation. In 1994, the rate of inflation was 2.8 percent. That means to stay ahead of inflation, your net worth would have had to increase by more than 2.8 percent.
Many financial problems are created simply because consumers spend more than they save. Knowing your net worth will help you avoid that trap. It will also provide you with a fundamental building block to reaching both long-term and short-term goals. Once you know where your finances are now, you can take steps to reach future goals and even dreams.