Hello again and great to have you back for the second day of the 31 Days Challenge to Financial Excellence! Today we are going to calculate our net worth to see how healthy (or unhealthy) our current financial situation is.
Your net worth is a sum of all your possessions (also called assets) minus the total of all your debts. You can either have a positive net worth, which means that you have more possessions than debt, or you can have a negative net worth, indicating the exact opposite: you owe more than that you own.
Examples of assets include: real estate, any money in savings or checking accounts, investments and valuables such as antique (don’t bother including your electronics or small jewelry though as these are unlikely to add that much value).
Examples of debts include any student loans, mortgage, credit card debt, overdraft, car loans and any personal loans with friends or family.
When you start calculating your net worth, you need to decide which assets to include and which ones to leave out. For example if you own a car, you can include the current value of the car, i.e. how much you would be able to sell it at. If you do however, bear in mind that with each passing day your car is likely to deprecate, or lose value (unless it is an antique car). Alternatively, you can therefore decide to leave out your car altogether and only include possessions that are not likely to deprecate. Whatever you decide is completely up to you, just make sure you are consistent every time you calculate your net worth again.
For any debt or asset that you include in your calculation, use its current and not its original value. So if you have paid your $200,000 mortgage down to $160,000, then work off the $160,000 outstanding amount. If you house was once purchased for $230,000 but is now worth $180,000 then again use $180,000 on your assets list.
Once you have calculated your current net worth, make it a goal to increase your net worth every month: by paying down debt and increasing your assets. At the end of each month recalculate and update your net worth (set a reminder in your calendar to not forget!) and keep track of it in a notebook or spreadsheet so you can see the progress that you are making.
When you’re done make sure to leave a comment in the Facebook group (you might even be brave enough to share your current net worth?) or send out a Tweet using the #31DayChallengeToFE hashtag. If you’d like to read more about net worth, make sure to hop over to step 6: calculate your net worth and step 7: Set a Net worth goal, both part of the 100 Steps Mission to Financial Independence.