From the very first moment I invested in stock purchases, I have always wanted a simple means and method of calculating my net worth. One of the things I did was to download a free trial of Microsoft Money.
The problem however, was in entering actual amount in my savings and current accounts, daily update of the value of quoted stocks I own and previous month’s balance of my retirement account. Apart from these, at the end of the three months, I had to log online to download the trial version since I could not afford the full version.
So the battle for an accurate net worth continued over the next two years till I came across a financial blog (the simple dollar) that taught me a simpler way of calculating my net worth.
How do you calculate your net worth?
First, make a list of all your assets. This includes retirement savings, your current and savings account balance, mutual funds and any other bonds you may have, the total value of any quoted stock holdings you may have. If you are a homeowner, you may include the value of your home (assessed by a real estate valuer). I usually do not include automobile since I do not consider it as an asset.
You can use your excel spreadsheet to calculate your net worth. Make a list that says ASSETS in capital letters at the top. Underneath that, on the left, I list what the asset is and on the far right, I list the value of the asset so that the decimal points of all the assets line up.
Once you’ve listed every asset you can think of, write TOTAL in big letters over on the left, then add up the numbers. Once you have this total, you’ve got the total value of your assets.
Now, make a list of all of your debts. You should list all of your credit card balances, personal loans, car loans, mortgage loans, and so forth.
Much like with the assets list, I recommend a big header that says DEBTS, with each debt listed below that on the left side and the amount of the debt over on the right, with the decimals lined up for easy figuring.
Once you’ve listed all of your debts, write TOTAL in big letters on the left, then add up all of the debt numbers. This total is the total amount of all of your debts.
Once you have these two numbers, the net worth calculation is simple. Take your total assets and subtract from that your total debt. The resulting number is your net worth.
What does a negative net worth mean? Some people panic when they calculate their net worth and discover that it is negative. This is usually the result of an individual with a substantial amount of personal loans, mortgage loan and also a loan on a rapidly depreciating automobile. Why is your net worth negative?
You simply haven’t earned enough money yet to overcome the weight of the debt. Don’t worry, it will come.
How can I make it bigger? Every time you make one of those debts smaller or one of those assets larger, your net worth will increase. So, you can increase your net worth by paying off your debts, saving and investing money, and reducing your spending.
On the other hand, your net worth goes down when you spend money on “small” things, such as clothes, fast food, and even interest on loans. Whenever you buy something frivolous, your net worth goes down.
I find it useful to calculate my net worth every month. My goal each month is to increase my net worth over the previous month, which means my expenses for the month was less than my income. I use the excess to increase personal savings.