If you’ve ever become confused when looking at your household budget, or find that the money you have in your bank account at the end of the year is less than you expected, you’ve run into a problem many people face when figuring their finances. How you record your income and expenses can lead to a skewed view of your finances, including your net worth. Keeping accurate records gives you a better handle on your real financial picture.
Your total earnings depend on whether you consider your gross or net pay your “total” earnings. For example, if you earn $5,000 per month, those are your total gross earnings. Many people consider their net pay, or what’s left over after taxes and other deductions, their total earnings. While you’ll get both numbers on your pay stub, you won’t know your true total earnings until after you’ve completed your annual tax return, because you might owe more taxes, or get a refund based on overpayment or extra deductions.
Your net worth is your personal wealth, which consists of your assets minus your debts. Your assets might include cash or retirement savings, securities, your house, car and other items you would be able to sell, if necessary. This might include personal items such as collectibles, clothing, jewelry, TVs, exercise machines, furniture, china, silver, appliances or any other items that have value. Your debts would include your mortgage, car or student loan, credit card debt and other obligations. If you have $50,000 in your retirement account, but $10,000 in credit card debt, the net worth of those two is $40,000. If you owe more money on your house than it’s worth, subtract that amount from your total assets. If you have equity in your home, add that to your assets. Even if your assets have not grown at the end of the year, if you reduce credit card debt, for example, your net worth will increase.
If you have take advantage of a 401k match at work, include your employer contribution to your total earnings. For example, if you make $5,000 per month and receive a 3 percent match, add $150 to your total earnings each month. If you earn interest on investments, include that money, less any taxes, to your total earnings and net worth calculations. You might include cash birthday or holiday gifts from parents or money from a garage sale. You may owe taxes on non-cash items you receive from your company, such as frequent flyer miles; check with your tax attorney to discuss any perks you receive from clients or your company.
Keep Accurate Records
If you have a budget, be careful you don’t double-count expenses, which will give you an erroneous picture of your net worth. For example, if you put your $350 January car payment on your credit card, then make a $350 credit care payment in February to clear the balance, don’t record both payments as expenses. If you do, your spending will appear to be $8,400 for the year, and your net worth will appear to be $4,200 less than it really is. Before making any significant financial decisions based on the value of your home, check an online real estate website that values your home in real-time to learn its current estimated value range. If you have a tax-deferred retirement account, take into consideration that the value you see in your account is not the amount you will have to spend when you retire.
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