What is your Net Worth?
Saturday, February 2nd, 2008 |If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
After calculating my net worth once a month for a bit more than a year I saw that sitting down once a month and thinking about finances can be very rewarding.
Before I started, my net worth was about minus 5000 dollars. That’s right – minus, negative 5000.
That means that if you were to take everything I owned in this world and sold it – you would still be about 5000 dollars short of having anything.
After calculating my net worth for the first time I come to the somewhat startling conclusion that I have a lot less than I thought.
I started to think if there is a way to grow my net worth.
There is.
With 1 year I got from the negative part of the scale to the positive and even some more.
But then I stopped calculating my net worth. Looking back at it – stopping was a bad idea. You should never stop.
This website – Psychology of money – is one thing that will hopefully keep me calculating my net worth each month for the rest of my life.
But why you ask?
Simple! I want my Net Worth to grow.
I believe that it is interesting for everyone to know how much they are worth if you only take into account the things you have and don’t consider what you know that can make you a lot of money in the future. At least we all like to think that we will make a lot of money some day in the future…
Calculating your Net Worth consists of 2 main parts. First you will have to add together the value of everything you own and secondly you will need to add together all your debt.
Your Net Worth is positive when you take everything that you have and after selling it you can pay off your debts and even have some extra money left.
However your net worth will be negative if the total amount of debt that you have is greater than the total value of the things you own.
That much for the theory, but now to the fun part.
My Net Worth (yes, this is for real)
Assets
Ownership in companies – $ 946
Pension funds – $ 895
Real estate – 0 $
Cars – 0 $
Stocks – $ 551
Cash on hand at the moment – $ 378
Things I own -
Mobile phone – $ 946
Camcorder – $ 189
Digital camera – $ 47
Laptop – $ 662
IPod – $ 47
All assets combined – $ 4 662
Debts
Student loan – $ 4490
Credit card – $ 115
Laptop payment - $ 606
All debts combined - $ 5211
Net Worth = Assets – Debts
My Net Worth = $ 4 662 - $ 5211 = -549 dollars
My Net Worth is MINUS 549 dollars.
As you can see I don’t like buying expensive stuff just for showing off. And I don’t like borrowing. I only take a loan when there is absolutely no other way.
That being said I am not satisfied with my net worth at all because I feel I should be worth more. But that is just the emotions talking, not the facts.
The facts are that I own very little and at the same time I owe very little. My assets and debts pretty much cancel each other out.
I am more than certain that there are people reading all this that have a lot more assets but at the same time there total net worth is lower than mine (this means that they also have a lot more debt than I have).
Tips on how to calculate net worth
Different people like to calculate their net worth differently. As you can see I have included the things I own all the way down to my digital camera that I estimate to be worth about 47 dollars today. Some people don’t include things that are worth less than 500 or 1000 dollars. It would just end up being too complicated and take too much time to complete. The reason I included my cameras and iPod is I don’t have too many things and it is not very complicated to do. Of course I have a lot of other things that are not listed on my net worth statement but the ones that I have included are the ones that are worth the most and at the same time are easy to sell.
Coming up with the values of your assets
Coming up with the price of your assets can be tricky. What I do is take the things that I have and have an educated guess – For how much could I sell this in two weeks?
The time period is something that you would have to come up with yourself. If you own a house you should probably put down the price you would get when selling it in 1 or 2 months. Whatever you choose – stick to it.
Check the prices of similar things
Look at your local ads magazine. Is anybody selling the same thing? If yes take the price and list it in your net worth with a 10% to 20% lower value.
For example if you want to know the value of your car, check the web for similar cars selling in your area and list it on your net worth a little cheaper. Use your common sense – for how much could you sell it in a few weeks?
The reason it is a good idea to list some of your assets as a bit cheaper than they really are is because you want to be sure that you can sell it in the timeframe you have in mind. Listing your car or your house as more expensive than it really is might look good on paper but in reality it would more likely harm than benefit you. It might give a false sense of security and thus do you more harm when you are suddenly in need of selling your assets.
Should you include the money in your pension plan or a 401K?
Yes you should. While this money might not be accessible to you at the moment it is still YOUR money and on some occasions you can use this money to secure a loan.
I have a house and a mortgage. Do I need to put them on my net worth?
Yes. The way you should do it is list the full price of your house under assets. And by price I mean the amount of money that you would get from selling the house before paying off your mortgage.
Under debt you should list the amount you still need to pay for the mortgage.
When you do all this you can actually see if your home is financially worth something for you.
If the price of the house is less than the mortgage then it means that after selling your house you would need to come up with extra money to pay for your mortgage.
If you take a close look of my net worth above you will see that I did exactly the same thing with my computer that I recommended you do with your house.
I still need to make 606 dollars worth of payments for my laptop (as seen under debt) and I estimate my computer to be worth about 662 dollars when I would need to sell it right away. That means that after selling my laptop and paying back the debt I would end up with 56 dollars.
Bringing you down to earth
Calculating your net worth is a good method to bring you down to earth. When first calculating their net worth most people are startled to find out that they are worth a lot less than they thought.
Make calculating your net worth a habit – you can only benefit from it. It does magic on making you think about your finances. It is exactly as I wrote in my post about the Natural Law of Money
If you start thinking about your net worth your chances of multiplying what you already have grow exponentially
The first step makes all the difference
