Net Worth

Now that you've gone through the process of organizing your cash flow (see previous post), you can begin to get a handle on your Net Worth. For those of you who weren't paying attention in the required Accounting 101 class, don't let those words intimidate you.

Net Worth is simply the difference between what you own (your Assets) and what you owe (your Liabilities). For a simple example, let's assume you have a 2001 Jeep Wrangler, and you have a loan of $5,000 on it. By going to Edmunds.com or kbb.com, you can determine what the current value of your car is. Spending about 2 minutes on kbb.com, I've determined that the consumer-to-consumer value of the Jeep is $11,655. The difference between the value of what I own and what I owe is $6,655 ($11,655 - $5,000 = $6,655). If that was the only asset and the only liability I had, my Net Worth would be $6,655.

So, tally up the value of the things you own (Assets) and the things that you owe (Liabilities) and figure out the difference. When compiling your Asset information, I wouldn't include clothing, furniture, and other household kinds of things, since you're not likely to use them as "investment" Assets, and value is pretty difficult to determine. You should, however, include as an Asset any loans that you have made to others (but only if there is a reasonable expectation that you'll someday be paid back). I wouldn't include the $20 that you lent to your roommate back in college, for example.

MS-Money or Quicken can be quite useful in this step as well, because they have the facility to classify and store this information in a very useful way. But, as stated before, if all you have is a spreadsheet (or even some notebook paper), you can still accomplish this last bit of organization.

Now, look at your number that you've come up with. Is it positive? That is, are your Assets more than your Liabilities? If so - take a second and do a little dance. It's called the "Positive Net Worth" dance. Enjoy it, you've earned it.

If the number is negative, you can also dance, just don't spend any money to do it! Actually, the situation you're in is not unusual at all - especially for younger folks - mostly due to high credit card debt and home ownership (mortgage) debt. It's certainly not hopeless, but maybe this Net Worth exercise has opened your eyes a little? We'll talk about how to reverse the situation in a later post.

For now, be happy that you are taking the steps necessary to finally get a handle on your financial situation. Next time, we'll begin discussing what all of this ORGANIZATION does for us.

'til then - jb