First Person: Understanding Your Net Worth

In an uncertain economy, it is very important to be able to track your personal financial health and be prepared for any potential challenges such as medical bills, car repairs, and even job loss. One of the easiest ways to do this is to use your personal net worth to track how your finances change from year to year.

How to Calculate Net Worth

Personal net worth is simple to calculate. While there is debate among financial experts about how exactly to calculate net worth, it is easiest to just add up your total value in assets and subtract debt. Basically, if you were to sell off all your assets and use the money to pay off your debt, the remaining amount would be your net worth. Your assets include home equity, automobiles, retirement accounts, cash, and other valuables. Not all items that you own should be used to calculate your assets. For example, there is no need to add in the $20 that you spent on your toaster oven. Stick to items that could be sold for at least $1,000 today. Once you have added up the value of your assets subtract any outstanding debt such as student loans, credit cards, and car loans.

Set Goals

Once you have established your current net worth, it is important to set goals for yourself. Setting goals helps you establish milestones to aim for and the ability to track your performance over a long period. If you have a negative net worth, your first goal should be to create a positive net worth. Next, determine what you want your net worth to be at retirement. Once you have established this number, you can break it into smaller, short term goals.

Increase your Net Worth

There are two ways to increase your net worth - increasing your asset values or paying down debt. Adding to your total asset value is easy. Simply paying your mortgage, putting cash in your savings account, or adding to your 401(k) can cause your total asset value to increase significantly. On the other side of the coin, you will need to reduce your debt. Every month that you make a payment on your car, student loans, or credit cards, your debt will decrease.

Tip - Avoid adding new debt when you are trying to increase your net value. Every dollar that you borrow, puts you that much further from your goal.

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