Knowing your net worth gives you valuable insight into your current financial standing. From there you’ll know if you’re making progress on your financial goals.
A formula for success
Calculating your net worth shouldn’t cause you to lose sleep. It is simply the difference between what you owe and what you own. Start by subtracting the total value of what you owe (your liabilities) from the total amount of what you own (your assets).
Your assets are valuable items that you own such as deposit accounts, stocks and bonds, investment accounts, retirement accounts, life insurance, cars and real estate — even if you still have a mortgage. Assets also include the value of your personal items such as jewelry, antiques and household items.
Your liabilities are the debts you owe to your creditors, including the amount you have left to pay on your mortgage or car loan, credit card debt, student loans, and home equity loans.
Once you subtract your liabilities from your assets and the result is a positive figure, it suggests you own more than you owe — meaning you’re heading in the right direction. A negative figure means just the opposite — you have more liabilities or you owe more than you own. This could indicate your plan needs some adjusting in order to increase your net worth.
It’s sometimes difficult to come up with a true dollar figure for your assets. An independent appraisal may be needed. Because those assets hold more meaning than simply a dollar figure, an appraiser can take the emotion out of the equation when it comes to putting a price tag on high-end assets like your home, artwork or jewelry. While the dollar value will never reduce the sentimental value, consider professional advice. Otherwise, you could end up with an inaccurate picture of your total net worth, giving you a false sense of wealth or debt.
Not a one-and-done calculation
There is a benefit to knowing your net worth. The result of your calculation is specific to your financial life. As such it’s difficult to apply an ideal number. The goal is to achieve a positive net worth — whatever the number — as long as it is in line with your financial goals.
Further, your net worth should be calculated periodically, not just once. Each instance becomes a snapshot of one moment in the bigger financial picture of your life. Combined, each snapshot shows a trend, which allows you to assess if your current path will help you reach your financial goals.
How to build your ‘net’ egg
When thinking about your net worth, keep in mind you aren’t competing with your friends or neighbors, but looking at a personal benchmark for your own financial life. Generally, the higher your net worth, the more resources and options you have available to handle financial challenges. Use these tips to grow your net worth:
Re-evaluate your debt
Don’t feel trapped by the amount of debt you already owe. Consolidate debt where possible. As a homeowner, you could consider tapping the equity built up in your home to pay off high-interest credit card debt. A Home Equity Line of Credit (HELOC) is open-ended, allowing you to withdraw only the money you need, as you need it, within a specific time period. With a HELOC, you may even be able to access the cash you need right away. Not only that, but it offers a tax-advantage; a homeowner may be able to claim a deduction, since the HELOC is considered a second mortgage. (Talk to a tax advisor for more details.)
In the end, lower monthly debt payments mean more money in your account to save or invest. Either way, your net worth trends upward.
Boost retirement savings
If possible, contribute the maximum amount to 401(k) plans and individual retirement accounts (IRAs) — these are smart ways to save for retirement. Check to see if your employer provides matching funds; this will help you grow your retirement savings and increase your net worth.
Cut expenses, boost savings
Look for small ways to save such as reducing your cell phone and cable TV plans, or bringing your lunch to work more often. You could also try eating out less, clipping coupons, and shopping grocery sales. Are extra hours available at work? Snap them up or consider a part-time job for extra income. Put the extra cash in an emergency fund, thereby boosting your net worth.
If your net worth is lower than you’d like and you’re just getting started, there’s still time to make adjustments. If you’re a senior and have a higher net worth — good for you; you’ve had more time to make and meet goals. Contact LGFCU to help map out a plan to increase or maintain your net worth.
Stay or change course?
Whether you’re planning for retirement or your child’s education, knowing your net worth can help you adjust your current priorities so you can meet future financial goals. This simple calculation gives you many snapshots along your road to success. Whether you stay the course or take a different road, knowing your net worth can help with course corrections.
Prepare your net worth statement
We’ve stressed the importance of knowing your net worth. Use the following steps to help you calculate your current financial standing. But don’t stop here. Recalculate your net worth periodically. Compare your progress and make adjustments as needed over time.
1. List your assets (what you own). Estimate the value of each and add up the total. Include items such as:
- Balance of your deposit accounts
- Value of your investment accounts
- Market value of your car
- Market value of your home
- Personal property, such as jewelry, art and furniture
- Cash value of any insurance policies
2. List your liabilities (what you owe) and add up the outstanding balances. Include items such as:
- Car/boat loan
- Credit card balance
- Student loans