Calculating a Networth is an activity that preoccupies a lot of the personal finance bloggers. Bargaineering Blog revisits this, and has some sensible advice to those who are interested in doing this activity. Naturally, I’ve done this for more than ten years myself. As I’ve done this exercise, initially every month, but now just quarterly, I found it’s quite interesting to work things out yourself and see how your net worth changes over the longer periods.
Observations that I have found useful:
1. Conservative estimates are best. Always underestimate your assets, especially valuable items or depreciating items. Cars are a good example as they devalue fast, and it’s usually difficult to get their second hand value at 100% of full value. In fact, I don’t even count my car, golf clubs, or other such items UNLESS they are also a liability, ie I borrowed money to purchase them. Check all your cash, bank accounts, retirement accounts, house value (always tricky!), stock accounts, any large insured items. I usually don’t count household contents simply because they lack value. It’s pretty difficult to sell most of our household items at anything like a realistic price. So I just don’t. Deposits paid on utility services or on rent might be a good candidate for this category.
2. With liabilities, it’s best to overestimate your liabilities if in doubt. Liabilities typically include mortgages and money borrowed for purchasing large ticket items, credit card debt and so on. It’s rare though that liabilities are not expressed in dollar terms as you usually get a statement with the unpaid amount regularly. Liabilities would also include any personal loans you have had from friends, any money or bills that may be unpaid, or any owed amount.
3. I added a couple of tweaks over the years that helped to benchmark longer term performance, though. a. The first was a formula for recording a percentage of wealth correlated with age and salary. I can’t at this moment remember where I found the formula, but it’s quite simple:
Current Networth / ( Annual Salary x ( Age / 10 ) ) = Current Rate of Achievement.
So, if I earned $100,000 and I’m 40. My current networth is $250,000 Total. My performance would be benchmarked as $250,000 / ( $100,000 x ( 40 / 10 ) ) = 62.5%. In other words, I would need to get hustling. Anything over 100% would suggest a good effort on your part!
b. The second benchmark that helped was keeping recordings and comparing them with the 12 months’ previously. That I found really helpful, as it highlighted how different parts of my assets performed. For example, looking back, there are times when my house languished but my bank accounts did well, other times, my bank accounts took a hit, my house rose a little and the stock market jumped. Very useful as it helped me not to worry too much about individual baskets, but to keep my mind on the overall picture.