A lot of homes contain a door frame marked by a lengthy row of pencil marks, each one showing how big the children of the house have gotten since the last measurement. The urge to assess how one grows lingers into adulthood, though, it shifts from height to other measures, such as waistlines and bank accounts. One of the most useful benchmarks of how you're growing financially is to periodically calculate your net worth, a metaphorical pencil mark or "you are here." Both your estimated net worth and your liquid net worth are useful pieces of information.
Net Worth Basics
Fundamentally, accounting works on a simple basis. Income and things you own are counted as assets or credits, and things you owe or pay on are debits or liabilities. Net worth is a snapshot of the relationship between those two figures at a given point in time. Calculating your net worth means adding up all of your assets, and subtracting your liabilities. The number that's left indicates roughly how much of an estate you've accumulated to that point.
Calculating Your Net Worth
To calculate your own net worth, start by adding up your assets. For example, you might have $35,000 of equity built up in your $250,000 home. Count the $35,000 you've paid for, because the rest isn't yours yet. Add in the total in your savings accounts, your 401k and other investments, the book value of your car and the estimated value of your remaining possessions. Now subtract your outstanding loans, the balance you owe on your car, your credit card balances and any other debts. The figure remaining is your net worth.
Equity In a Business
If you're self employed, it can be harder to calculate your net worth. Thomas Stanley and William Danko, authors of the 1998 bestseller "The Millionaire Next Door," spent 20 years interviewing people with a $1 million or more in net worth. Many of them were taken aback at being classed as millionaires. In their own minds they were just regular blue-collar guys, taking a small salary from their company. Yet, the equity they'd built in the company amounted to a million or more. Ask your accountant how to value your business as part of your overall net worth.
Liquid Net Worth
That business is a perfect example of the difference between net worth and liquid net worth. It's much of your net worth, but can't be converted to cash readily. Liquid assets, on the other hand, are those you hold in cash or can readily convert to cash, like stocks. Your liquid net worth, then, is the total of liquid assets you can draw on at a given moment. Most of your net worth is not liquid, so keeping enough liquid assets to meet emergencies is an important point to consider in your financial planning.
- New Mexico State University Cooperative Extension: How To Calculate Your Net Worth
- Financial-Library.com: Financial Planning Form: Net Worth Statement
- The Millionaire Next Door: The Surprising Secrets of America's Wealthy; Thomas J. Stanley, PhD; William D. Danko, PhD
- Merrill-Lynch Wealth Management: Liquidity Management for Individual Investors
- Jupiterimages/BananaStock/Getty Images