This is a question we often get and here’s the simple explanation: Your ‘Net Worth’ is a measurement of your financial health. Just as it’s important to check your blood pressure and heart rate for your physical health, checking your financial health can reveal potential problems before they become life threatening. If, for example, your blood pressure is high, then you need to avoid stress, coffee, alcohol, sugar, salt and fatty foods. In money terms, if you owe much more than you have in Assets you could be in serious trouble if you lost your income or there’s a downturn in the economy.
How to do it? There are loads of templates around (we have a very simple but comprehensive one in our books and online course) but many of them are overly complicated. It’s really as simple as drawing up 2 columns on a piece of paper: one for Assets and the other for Debts. Assets are all the things you own that you can sell fairly easily if you needed to, and you have to attach a realistic value to each item.
So, even though you think your home is worth a million dollars, if all the houses in your neighbourhood are currently selling for half that, you should go with the lower amount. Same thing with your car: it may be in immaculate shape but if there are lots of other models of the same vintage for sale in your area, that’s what you can expect in a sale. Look up your car model on Auto trader or Kelley Blue Book to get a realistic appraisal. Your bank balance, stock portfolio, if you have one, and your 401 (k) are all very simple – just get your latest statement for the current value.
Under the Debts column list everything you owe: credit cards, lines of credit, student loans, mortgage, car payments etc. Total up each column and deduct the Debts from the Assets – the result is your Net Worth.
Now, lots of people have a negative Net Worth, particularly young people who have just entered the workforce with lots of student debt. As long as you have a secure income it’s not necessarily a big problem, but it is - and should be - a wake-up call to do a course correction and reduce those debts as soon as possible. Just like the blood pressure check this could be a life saving piece of information that keeps you out of the hospital.