Excel 4 Ur Business

Net worth is one of those phrases that you hear now and then, but what does it mean? Simply put, it is the sum of all your assets (things you own) minus the sum of all your liabilities (things you owe). Take what you own and subtract what you owe to get your net worth.

Net worth is a way to track your financial progress or to get a snapshot of your financial status at a given time. In a way, net worth can be thought of as a measure of your financial health. The greater your net worth, the greater your ability to achieve major financial goals and to withstand unexpected financial stresses, such as being laid off or having a serious illness.

I should emphasize, however, that net worth is not a contest. The point is not to have a higher net worth than your friends and co-workers, but rather to use net worth as a tool to evaluate your own financial situation and progress. There are no net worth yardsticks to measure yourself against.

For one thing, net worth naturally changes with age. For most people, it will increase throughout life up to the time of retirement. If, for example, you have recently graduated from college, it is very possible that your net worth will be less than zero because you owe college loans and own basically nothing, and that’s perfectly okay. If you are 50 years old and have a negative net worth, however, it’s a good sign of problems.

Another factor is the kind of life you have chosen to live. Some occupations are higher paying than others, and perhaps you have chosen a lower paying career based on non-financial rewards. There’s no reason, for instance, that a public school teacher should expect to have the same net worth as a heart surgeon at the same age.

Assets to Include

Some assets are clearly appropriate for inclusion in your net worth calculation. These are

• Your bank and investment accounts
• Your retirement accounts
• If you own your home, the market value of the house
• Any business or investment real estate you own
• Cash value life insurance
• Money you are due, such as a tax refund or bonus

Valuing Your House and Car How do you go about placing a value on your house and car? For a house, the value was appraised when you bought it and probably again if you took out a home equity loan. You should have received a copy of the appraisal-after all, you probably paid for the appraisal-and you can use that value. If the appraisal is more than a couple of years old or if you have made major home improvements, the value might not be accurate and you might want to consider having a new appraisal done. Your house will also be assessed for property tax purposes. This assessment is done by the city or county and homeowners are sent a copy of the assessment soon after it is done. If your local assessments are done based on market value (not all are), you might be able to use this value in your net worth calculations. It is probably a good idea, however, to ask a local realtor if the tax assessments in your area are a good indication of a property’s market value. For cars, the best known source is the Kelly Blue Book at http://www.kbb.com. There are three values provided: The trade-in value, or what you might expect to get for the car if trading it in on a new one; the private-party value, or what you might expect to be able to sell the car for in a private transaction; and the retail value, or what you would expect to pay for the car if buying it from a dealer. You should use the private-party value in your net worth calculation.

As for other assets, the opinions of financial experts differ. One such category is personal possessions, such as cars, furniture, collectibles, and artwork. These possessions certainly have value, so there’s a valid argument for including them. They are not readily convertible to cash, however, which is why some experts prefer to leave them out. This choice is up to you as long as you are consistent-in other words, you should consistently include or omit them in each net worth calculation. If you do include them, please remember the following tips:

• If you include a car, be sure to use a valid market value for the car. You must also include any outstanding loan on the car as a liability.
• Most furniture, the kind most of us have, is probably best omitted because second-hand furniture typically brings very little. Valuable antiques are a different matter.
• Collectibles and artwork must be valued fairly at the market value and not what you paid for them. A stamp collection that cost you $5,000 to put together might fetch only 1/10 that amount when sold, and it’s this latter value you should use in a net worth calculation.

Future income generally should not be included. Examples are your next paycheck and things such as pension or social security payments. You can make an exception for one-time payments you know about but have not yet received, such as your annual bonus at work.

Liabilities to Include

Liabilities are easier than assets because you must include all of them. Any money you owe must be counted in the liability column, including personal loans from family members.

What about credit card balances? If you let them ride from month to month, they certainly must be included as a liability. If you pay the balance in full each month, you can omit it, but you also have to omit from your assets the cash you will be using to pay the card off.

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