PROFESSIONAL FREEDOM TAX SERVICE
Tax Service Blog
Tax Service Blog
|Posted on October 12, 2012 at 6:50 PM|
What’s your net worth?
On the surface, that might sound like a silly question—how many of us walk around knowing the exact figure for the ratio of our debts to our assets? But calculating your net worth isn’t the dry, academic exercise it might sound like. Calculating your net worth means taking a long, hard look in the mirror and accurately assessing your financial situation. It’s the first step on the process towards more advanced financial planning, like saving for retirement or paying off your debts.
Resources, such as worksheets or calculators, exist to help you calculate your net worth. The worksheets ask you to add assets on one side of the page—things like cash on hand, cash in checking, market value of your home, market value of your property and the value of your retirement account, among other assets. Then once you have that total, you subtract the total of your liabilities to get to your net worth. Liabilities are the balance owed on your loans—from student loans to credit card to mortgages—as well as unpaid utilities and back taxes, among other money you know you’re going to have to pay in the future.
For instance, your net worth calculation might look like this:
Assets VS LiabilitiesCash in checking: $2,000, Student loans balance: $11,000, Cash in savings: $5,000, Balance owed on credit cards: $1,150, Value of car: $10,000, Balance owed on car loan: $8,000, Value of 401(k): $16,000, Balance owed on other loans: $2,000. Total Assets: $33,000Total Liabilities: $22,150
Subtract total liabilities ($22,150) from total assets ($33,000) = $10,850
In this example, your total net worth is $10,850.
You may find that the number is negative, meaning you have more liabilities than assets. Don’t be discouraged! While it’s not a rosy picture of financial health, you can’t fix the problem until you know the extent of the damage. Remember that net worth is unique to your situation, and a negative number doesn’t always mean your affairs are out of order. For instance, a doctor just graduating med school is likely buried in student debt, but due to the steady future income stream and employability conferred by the new degree, a negative net worth isn’t as bad as it appears. That’s what we found when we saw that NerdWallet recently challenged five contestants in the personal finance reality show ‘So You Think You Can Finance’ to create a net worth statement. Many of the contestants are young and just making the jump to financial independence—so the majority of them came up with a negative net worth number. Of course, it’s better to have a positive number—your net worth is an accurate way to measure how much money you truly have, so the larger your net worth number, the more well-off you are right now.
Once you have assessed your net worth, the next level is to figure out how to get from your current state to where you want to go. Again, it’s a highly individual process, but for many it will include creating a time line for becoming debt-free, as well as creating or optimizing a retirement savings plan. Let’s take the example of Jia, one of the contestants on ‘So You Think You Can Finance’. She did a great job on the net worth challenge – but the judges questioned whether she was ready to build on her net worth foundation to achieve her long-term financial goals. Had she begun incorporating her retirement savings into what she described as a balanced and healthy net worth picture? Also, she talked a lot about how her plans for marriage to her boyfriend figured into the future—but how would he fit into the financial picture? Deciding on joint accounts, prioritizing joint expenditures and aligning future savings is a key part in building on a basic net worth statement. Below are additional examples.
Subtracting your liabilities from your assets may seem like a simple math problem, but a well-thought out net worth statement is an important foundation you can build all your future financial planning on top of. So go ahead and calculate your financial worth, and let us know in the comments how you’re going to use it to plan your financial future!