Tracking and Making Annual Adjustments to Your Net Worth

by Kevin on January 5, 2009

What is Net Worth?

We track our net worth. I define net worth in a basic manner: assets minus liabilities. Essentially, if you sold every single last thing you own to pay off every single last debt you have, net worth is what is left. If you have negative net worth that means you wouldn’t be able to pay off all of the debts if you sold everything and that’s not a good situation to be in!

Should We Even Be Tracking Net Worth?

Some argue that net worth is a meaningless number while others claim it to be the financial holy grail. I’m somewhere in the middle. To me net worth is simply a big picture, bird’s eye view, of where you stand financially. A lot of the numbers I use are estimates as there is simply no way to tell what our all of our  assets would sell for if we had to sell all at the same time.

Additionally, I don’t track every single thing we own. The silverware in our kitchen doesn’t count toward net worth. Our television doesn’t either. I stick to the big items for the most part.

Assets We Track for Net Worth

The asset side of our net worth equation looks like this:

  • Cash / cash equivalents (checking accounts, savings accounts, CDs)
  • Retirement accounts (Roth IRAs, 401k)
  • Investment account with Firstrade
  • Value of our home
  • Value of our vehicles

The first three are really easy to calculate. I do count the value of our home in our net worth even though it fluctuates up and down and there’s no telling what it would sell for in today’s market (although I’ll admit it would sell for less than what we paid for it). For this value I simply used what our county tax assessor office said our home was worth. This may seem inappropriate, but we’re not moving for several years and well, I don’t have a better way to estimate what it’s worth.

The vehicles aren’t as hard to value. I pulled up the Kelly Blue Book and equated their current values.

Liabilities We Track for Net Worth

The flip side of the equation tells us who we owe money to, and how much. The categories on this side look like this:

  • Mortgages
  • Student loans (for my MBA, in deferral and ready to be paid off)
  • Credit card balances

That last one may catch some of my loyal readers off guard. “I thought you didn’t carry a credit card balance!”, you might say.

And that’s true, we have never carried a balance on our credit cards. We pay them off in full every month. But when I calculate our net worth at the beginning of every new month, we’re in the middle of a billing cycle and there are charges “on” our account. I have to account for them or our net worth would be skewed positively by whatever our current balance is. (Because the money to pay the charges is in our checking account, which is on the asset side of the equation.)

Making Annual Adjustments to Net Worth

As I mentioned in my net worth update for December 2008, our net worth went down 3.67% because of adjustments. What adjustments did I make? As I mentioned before, our dropped the value of our house a bit to what the tax assessor said it was worth. I also devalued our cars to current levels — which was quite dramatic.

I also added an extra semester’s worth of student loans to the total. I completed another semester in 2008 and I’ve received the maximum reimbursement from my company for that year, which negatively impacts net worth.

I make these adjustments annually simply because it is time consuming to do it on a monthly basis. I don’t want to look up the Kelly Blue Book value of our cars every month. Nor do I want to try and somehow calculate the value of our home.

Net worth is part science, part art. I’m of the mind that the liabilities side is the most imporant — driving it to zero. Imagine the day when I tell you our liabilities side is just our credit card “balances” — no mortgage, no student loans. That’ll be something to build on.

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Is Net Worth Important?
April 29, 2011 at 6:30 am

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SimplyForties January 5, 2009 at 7:24 am

I do mine annually as well. I’ve always wondered how different people come up with the value of their house as I don’t think they are having appraisers trot over every year. Using the tax assessors value seems an interesting choise as, if you’re lucky, that assesment is low. Maybe you’re in better shape than you think!

Kevin January 6, 2009 at 9:01 am

@SimplyForties: In this instance the tax appraisal may be higher since values have fallen a little bit. But its impossible to tell.

I did have someone email me and tell me I should be using Zillow.com for our valuation instead. Generally, I like the idea. However, we live in a new neighborhood and our section of the neighborhood isn’t even on the map.

On top of that the other homes at the beginning of the neighborhood, when I looked them up, had wrong information (0 bedrooms, 1 bathroom) and odd home values. This makes me not really trust Zillow in this instance.

Russell Fascenda January 11, 2009 at 8:03 am

That’s a worthy goal to reduce the liabilities to zero, I think I’ll always have a mortgage but I still dream of the day. I don’t regularly compute net worth, probably less than once a year, and like you only major belongings are on my list. For the car and motorcycles I think the local newspaper or shopper is probably a better gauge. I also toss a round number on there for furnishings, and something for a computer if it’s relatively new.

I don’t make comparative statistics like you do, mostly I just want to know where I generally stand. The first time I computed a net worth, I was pleased that it was greater than zero. Years later when it exceeded $100,000 for the first time I felt good. When I was out of work for many months and traded some assets for liabilities, it helped to see my net worth and console my self that my decisions didn’t affect it. (Yes you can argue it affected future net worth but at a time of no income that wasn’t my primary concern.)

As you said, it’s part science and part art, which is probably why I compute it infrequently and just take subjective looks at it. MS-Money would compute net worth at the touch of a button, but I don’t have every asset and liability loaded in there so I still do it manually with my own list in a spreadsheet.

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