How To Determine And Track Your Net Worth

By glblguy

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Proverbs 24:3-4 – Through wisdom a house is built, and by understanding it is established; and by knowledge the rooms shall be filled with all precious and pleasant riches.

Today is the last day of the month for July and as I do every month, I spent the morning updating my net worth. If you aren’t tracking and updating your net worth, I would highly recommend you do so. It’s a great way to monitor the overall progress of your finances. As Proverbs 23:3-4 says, through wisdom and understanding your rooms shall be filled. Tracking and managing your network will provide you with both wisdom and understanding to deal with your finances better.

What is Net Worth ?

Your net worth is basically your total assets – your total liabilities. Assets are things like your home, cars, cash in your bank accounts, stocks, retirement accounts, etc. Liabilities are things like your mortgage balance, car loans, credit card debt, and 401k loans (see comment section below).

I like to think of net worth as the amount of money I would have (or owe) if I sold everything I owned except the clothes on my back and payed off all of your debt. My net worth would be the money I have remaining.

Determining/Tracking Your Net Worth

I track mine using a simple Microsoft Excel spreadsheet. I update it monthly on or around the last day of the month. I also graph mine so I can see a more visual representation of my net worth. If managing your own spreadsheet is more than you want to deal with, I recommend you use Networth IQ. It’s a website that tracks, graphs and allows you to update your net worth easily. It also allows you to share and compare your net worth with others in your age and salary range so you can see how you line up.

List your Assets

I first list off all of my assets and place their value next to each of them. Some suggestions for determining value:

  • For your house, use those weekly sales summary listing that come in the mail from various real estate agents. Take all of the sales in your area and determine the average value per square foot (sales value/square foot) for the homes that sold. Next, multiple that by your home’s square feet to come up with an estimate. You can also call a local real estate agent and have them do a free market value estimate as well. The Dough Roller also has a great listing of websites where you can look up your home’s value.
  • For your car, use Edmunds or Kelly Blue Book. I prefer Edmunds, but either will work.
  • Your employer should have a website or phone number for obtaining the current balance in your 401k. Make sure you only claim your vested amount, otherwise you will skew your net worth incorrectly.
  • Of course you can determine your current account balances by logging into your various banks online banking systems.

I don’t include personal items like furniture, clothing, and other stuff. It’s just too difficult to determine the overall value, so I just leave those out.

Once I have listed the assets and their values, I total the value up under Total Assets.

List your Liabilities

I then list off and total up my liabilities. Liabilities should include any debts you owe to other companies or people. It should also include any debts you may owe yourself such as 401k loans. Again, next to each liability, list off the amount you owe on each as of the day your are doing the update.

Your Net Worth

You net worth is simply:

Net Income = Total Assets – Total Liabilities

If you have a lot of liabilities, it’s quit possible your overall net worth may be negative. Again, I update mine monthly on or around the last day of the month. Some others, such as Trent over at the The Simple Dollar update his weekly. I have also read that some update theirs only once or twice a year.

What Should Your Net Worth Be?

There really is no right or wrong answer as to what your net worth should be. There are many ways to determine this, and many different opinions about how to determine this.

The calculation I use is from the The Millionaire Next Door by Thomas J. Stanley and William D. Danko. If you haven’t read this book, you need to. It was a life changing book for me. Based on the The Millionaire Next Door you determine what your net worth should be as follows:

Target Net Worth = (Your Age * Your Pretax Annual Income) / 10

The glblguy’s Net Worth

Hate to disappoint you, but I’m not going to tell you what mine is, but I will share my updates for July and I’ll tell you I’m a long way off from what my net worth should be:

  • My overall Net Worth is up 44%. This is a huge jump, and due to me under valuing my home. I spent a lot time this month researching local sales and we had a real estate agent do a fair market analysis.
  • Our overall assets increased by 9% due to the increase in our home value.
  • Our overall liabilities decreased by 1%

We weren’t near as aggressive on our debt this month due to some unexpected expenses and purchasing a number of items at an auction. We should recover this next month through sales of the items on eBay and those proceeds will go to paying off our debt.
Do you maintain your Net Worth? If so, what tools do you use? How often do you update yours and how to you determine if you are on-track?


16 Responses (including trackbacks) to “How To Determine And Track Your Net Worth”

  1. Enough Wealth Says:

    You’re not treating the 401K loans correctly – since it’s a debt to yourself, you are also the creditor. Just as you would include $10K you’d lent your brother as an asset (assuming you expected him to repay it), the 401K loan should also be counted as an asset as well as a liability. Net net there is no impact of a 401K loan on your net worth.

    This doesn’t mean that a 401K loan is a good thing though. Although it doesn’t impact your current net worth figure it certainly can adversely affect your future net worth. For example, if the 401K loan was used to buy something that isn’t a financial asset (eg. a big screen TV that will depreciate to $0 value over a couple of years), you will have to repay the 401K loan out of future cash flow, which will reduce the amount you can add to your savings while the 401K loan is being paid off.

    Conclusion – for net worth calculations you can ignore a 401K debt, but this is usually a form of “bad” debt and should be avoided if possible.

    Regards
    http://enoughwealth.com

  2. glblguy Says:

    I see your point and after thinking on it some more I agree. I actually struggled with the decision to include it when I wrote the article. I decided to include it since it is “bad” debt and due to the fact that if for some reason I lost my job I would need to pay it back or suffer penalties.

    But I fully appreciate what you are saying as well, as it really isn’t a “true” debt as I owe myself.

    I think I am going to leave it on mine as a reminder to keep me focused on getting my debt paid off. I’ll strike it from the article above as you convinced me it generally doesn’t make sense from an overall financial reporting perspective.

    Thanks for the input and for visiting!

  3. MITBeta Says:

    Quicken tracks my net worth for me. Looks like we are at about 50% of where we should be according to the MND metric. Looks like I need to save greater than 10% of my pre-tax income each year to catch up to where I should be. The sad thing is that I thought I was doing well considering that I know I’m doing better than most of my peers…

  4. glblguy Says:

    Well, you’re doing better than I am. I at about 40% of what I should be. I do give myself a little slack though, as that calculation doesn’t factor in for 6 kids :-)

    As for comparing against your peers, I’ll quote Dave Ramsey “Live like no one else, so you can live like no one else”.

    Thanks for dropping by MITBeta, appreciate you commenting

  5. MITBeta Says:

    Actually, now that I’m looking in Quicken I realize that my savings rate doesn’t have to be as high as I thought since much of the increase in my net worth month to month comes from debt reductions. The 2nd of 4 student loans will be paid off next month…

  6. glblguy Says:

    There you go, another good reason to eliminate debt ;-) Congrats on getting that 2nd student loan paid off, 1/2 way there!

  7. J at Home Finance Freedom Says:

    Hello. A 401k loan must be subtracted, and is offset only by current assets such as the loan’s unspent cash or the TV you bought with the loan (even if you say that the accounts payable/receivable cancel, the money is still gone from the 401k). The 401k’s net worth is also offset by tax and penalty liabilities to liquidate it today.

  8. glblguy Says:

    @J – Your argument is the exact thing that made me struggle with the decision in the first place. Thanks for the input and for offering a different perspective.

  9. MITBeta Says:

    As a follow-up, I just ran a quick calculation that shows that I should be able to catch up to where I “should” be according to this formula within 6 years.

  10. glblguy Says:

    Wow, that’s not too long at all. Now when you say catch up is that based on what your NW should be 6 years from now? (would assume so, but figured I’d ask to be sure)

  11. MITBeta Says:

    Yes. I ran a couple of different cases in a spreadsheet. I assumed a 3% increase in my income and an 8% gain on my investments. So the catch up point runs the target net worth calculation on my income at that time.

    What’s interesting is that I ran a case for my wife leaving the workforce in a couple of years when we expect to have more children and the catch up point doesn’t change by much. Our income at that point in time will be lower, so the target will be lower, but we will still be saving (knock on wood) a substantial portion of our gross income.

  12. glblguy Says:

    Great! Like I said I figured you did it right. That’s great that even though you wife is leaving the workplace you are still on track. We made that decision for my wife to stay at home 13 years ago and don’t regret it once.

  13. MITBeta Says:

    Off topic: We had our first child in January and my wife had planned to work a part-time schedule from home, even though her boss wasn’t thrilled about the prospect. Just before her maternity leave ended she was offered a very similar job to what she had (she’s a licensed civil engineer) but that WANTED her to work from home — for more money and better benefits. She has been able to get 20 hours of work in per week while taking care of the baby. She gets a few hours each day during the day and then makes up the difference when daddy is home on nights and weekends. It works pretty well for us now, but I don’t know whether throwing more kids into the mix will allow this to continue. And since we have discussed the possibility of home schooling, the opportunity to get any work done during the day might evaporate altogether — unless the kids can quickly learn how to analyze wood beam truss construction…

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