Net Worth: What’s it worth?

There are many metrics you can use to determine your financial health.  You can track the amount of money you have currently in your checking account, the money in your savings account or a combination of both.  You can also track the amount of money in any investment accounts, the amount of student loan debt or even the value of your car and house.  All of these numbers can be useful and people put more emphasis on some over others.  The number I believe is most useful, however, is your net worth, which is a combination of everything.

What is a net worth anyway?  Definitions vary depending on who you ask, but the basic definition is that your net worth equals the value of your assets minus the value of your liabilities.  Now there is some disagreement on what makes up an asset or a liability.  Is the equity of your house an asset or is your mortgage a liability?  Should your house even be in the equation because you can’t really tap the value until you sell or take out a home equity loan?  Should the value of your car be included since it is always depreciating in value?  Should your small business expenses be included?  The list can go on and there are calculators such as this that can guide you: http://www.bankrate.com/calculators/smart-spending/personal-net-worth-calculator.aspx

Personally I include checking accounts, savings accounts, and investment accounts as my assets, and credit card debt and student loan debt as my liabilities.  I believe this is an easy and effective way to see how you’re doing financially.  While it can be fun (or frustrating) trying to figure out what is an asset or not, I don’t believe the details are really that important.  What is important regarding net worth is that you use it consistently from month to month to track how you are doing financially.  If your net worth is consistently going up over a 6 month period, that is a sign that you’re moving in a positive direction.  If your net worth is going down consistently, that might be a sign to examine it more closely and see what changes you can make.  What’s important is that you use it as a barometer to see how you’re doing compared to last month, and decide to stay the current course or adjust.

Now that we know what a net worth is and how it can be calculated, in my next post I’ll go over how we can harness this knowledge to produce an actual change in our finances.