Net Worth

Net worth is your assets (what you own) minus your liabilities (what you owe). Get yourself a positive net worth and have more invested assets than use assets.

To figure out where you are, you need to figure out what you've got. So,  you'll need to work on the net worth statement Spreadsheet. This can be simple or complicated. It's going to depend on how simple or complicated your life is and how much stuff you own.

Net worth is snapshot of what you own at a particular moment in time. Next month it will be different because you will have spent some of the money in your checking account, your mutual fund may have appreciated, or you could have sold your home. In accounting terms, a net worth statement is your assets (what you own) minus your liabilities (what you owe). You subtract your liabilities from your assets to determine your net worth.

What You Own

List down what you have and organize into difference categories.

Start with the plus column. What are the assets you own? You will need to list everything that is yours. Take the time to separate who owns what. This will be important for estate planning. You will also use a net worth statement when you are reviewing your insurance needs. Try to be as accurate as you can.

There is no need to list your household items individually; you can lump those together. Their worth is not the price you paid for them; Your dishes may have been $50 a place setting, but if they are 10 years old, they have depreciated---gone down in value. The same it true with that recliner. It is worth less than the original purchase price. Now, it may be a different story with the value of your home because that, I hope, has increased in value---appreciated over time.

When you reach the section about investments, note that it is broken into "invested" assets and "use" assets. Your invested assets are those that help you reach your goals. The use assets are what you use to maintain you lifestyle. This is the column that holds your toys such as the summer house, the sailboat, and your jewelry. These assets do count when adding up your total net worth, but they usually are not the assets that contribute to that comfortable retirement.

What You Owe

List down what you owe and organize into difference categories.

Now for the negative column: what you owe. With all of that good stuff you own, your net worth was looking pretty good, wasn't it? Now you've got to fill in the "liabilities" column. Ouch! For some of you, things aren't looking too good right now.

Let's take a look at the kind of debt you've got. Is it a home mortgage you have or a student loan? This kind of debt is used to increase your net worth, so it's considered good debt, Yes, as student loan is good debt because it allowed you or your kids to further your education and increase your salary capabilities.

Much of the debt you may have is short-term debt: taxes that are due, a church pledge, that dental bill for a new crown, or credit card debt. Credit card debt that you carry beyond one month is bad debt because you are using credit to pay for items you have consumed, such as dining out and movies. Carrying that debt forward from month to month can get very expensive with the high cost of credit today.

A positive net worth is what you want here. You want to have more assets than liabilities, and you want to have more invested assets than use assets. A high net worth that consists primarily of toys and your primary residence might produce a great bottom line, but it's not going to help you achieve those realistic goals such as sending the kids to college, getting out of debt, or providing for an early retirement. One of the hard things about being a grownup in this situation is that you may have to put away some of the toys and concentrate on increasing the invested assets.

A negative net worth spells trouble. In this case, you owe more than you own, to put it simply. This can happen if you have used your credit card to supplement your lifestyle or to buy things than don't appreciate. You might have gotten into a real estate deal in which the real estate didn't appreciate but actually depreciated, and your mortgage is now more than the real value of the property. This is a situation you need to turn around. As you evaluate your net worth, remember that it is just a snapshot in time, and you have the ability to alter it for the future.