Day#11: Compute Your Net Worth

This is Day #11 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow.

Here’s today’s installment:

Today’s Task: Compute your net worth.

Here’s the simple formula:

Total Assets - Total Liabilities = Net Worth

Now, let’s break it down a bit. Your total assets may include your home, car, and properties (if fully paid for). Your savings, cash, and investments also fall in this category. If you have expensive jewelry, artwork, and other valuables, you can include them as well.

You probably have some assets that are difficult to estimate. For your house, you can use the estimated worth listed in your real estate tax invoices (although these tend to be too low). For vehicles, you might use its possible second-hand resale price. It’s up to you how to estimate these things, but I lean towards choosing more conservative estimates so that I don’t get overconfident. Do what works for you.

Total liabilities on the other hand, are the things you owe. You can start with the simple things such as the current balance on your mortgage and other loans, your current credit card debt (including interest), and any amount you owe friends and family. Add up all these figures to come up with your total liabilities.

Once you’ve figured out both your total assets and total liabilities, use the formula above to compute your net worth.

If you want to do this automatically, you can use this online net worth calculator I made for FrugalPinoy readers. You can click “File > Download As > Excel” to save the calculator as an MSExcel file in your computer.

Why is your net worth important?

• It can be a great source of motivation. Trent of The Simple Dollar uses his net worth to watch his own progress and inspire himself to do better financially.
• It gives you a realistic picture of your finances. Since your net worth includes your income, savings, investments, expenses, and debts, it gives you a better idea of where you are financially. Instead of just looking at your income, you’re looking at the big picture.
• It allows you to make life plans based on your financial health. You may be fantasizing about retiring at 40, but it is realistic based on your current net worth? (The same goes for other major life plans such as starting a business, buying a house, getting married, etc.)

Remember that your net worth is dynamic. It changes over time. You can compute it as often (or as rarely) as you need. Although I have a spreadsheet that computes my net worth every time it changes, it’s not necessary for me to obsess about the number that often. Once or twice a year is enough for me. Just do what works for you.

If you’re young, don’t worry about having low net worth. As long as the number is positive, you shouldn’t stress over it. After all, you have a lifetime ahead of you to build it up. There might also be other reasons why your net worth is low - you put yourself through college, you send your siblings to school, you’ve just invested in a business, etc. These things might decrease your net worth a lot, but they give you a different, more intangible value in return (for now, at least).

Did you compute your net worth today? How do you feel about it?