Calculating Your Net Worth
I just finished my annual net worth calculation. The good news: It’s headed in the right direction – up. The bad news: I can’t retire yet. (Kidding. I like my job.)
Figuring out your net worth is a straightforward exercise (so why is this post so long? Sorry. Again.) First add up the value of all of your assets – the cash under your mattress, your checking and savings accounts, stocks, bonds, mutual funds, any retirement savings and life insurance policies that have accumulated cash value. (While you’re adding it up, take the cash from under your mattress and deposit it in an online savings account.)
Add to this the value of your physical assets, such as your home, other real estate, and your vehicles. You can guess-timate the value of your home by taking a look at the local real estate websites, or realtor.com; and find the approximate resale value of your auto at Edmunds.com.
Next, imagine you have decided to sail around the world and liquidate everything you own, from the high-definition television on the wall to your four-carat diamond ring. You should ballpark everything, but be honest with yourself about the market value – which you can benchmark on eBay. What you would likely receive if you sold all these items today? Add that figure to your asset value. Now determine your liabilities: Credit card debt, student or auto loans, mortgage – any money that you owe. Now subtract the latter from the former: That’s your net worth.
Your net worth is the most accurate barometer of your financial progress. In the simplest terms, as you pay down debt, and boost your savings, your net worth rises. It’s a good idea to revisit your balance sheet on an annual basis, to see where you stand financially, and help you refine your goals for the coming year.
Your net worth should increase by a greater percentage each year in your younger years versus when you are nearing retirement. For instance, let’s say your net worth is $1,000 at age 20. You could easily grow it 40 percent in a year ($400) as you save and pay down debt. By contrast, if your net worth is $100,000 at age 40, to grow it 40 percent would require an additional $40,000 a year, much harder to achieve.
I’ve seen ballpark formulas for figuring out what your net worth should be at a given age. But I think some of them are shocking, scary or depressing rather than helpful (like those “You have to save $2 million to retire” formulas.) For instance, one formula suggests you multiply your age times your pre-tax household income and divide by ten. So if you’re 35, making $80,000, your net worth should be (35 x 80,000) divided by 10, or $280,000. That may be very unrealistic for someone who has a lot of student loan debt, or a big mortgage.
Also, I know my own net worth will decrease drastically when my three kids (now 10, 8 and 5) finish college, because the assets I have been saving for that event will be gone. From a happiness perspective, I think you have to take a broader view of personal worth, and recognize that it may decrease materially when you achieve major life goals. Consider someone who has just finished medical school; the average debt is more than $130,000, and 72 percent of grads have more than $100,000 in debt. But soon they will be making the big bucks, and, judging solely by the viewing of Grey’s Anatomy and Private Practice, enjoying complicated love lives.
But if you can’t help comparing yourself to others, take a look at the Federal Reserve’s Survey of Consumer Finances. It’s the most comprehensive research on American’s personal finances, released every three years. In the most recent report (2001-2004), median net worth rose 1.5 percent to $93,100. That compares to a jump of 10.3 percent in the previous three years, and a rise of 17.4 percent increase in the three years before that. So net worth has grown more slowly in recent years (which makes sense, given the time frame included 9/11, the stock market meltdown and an economic recession.)
The report breaks out net worth by certain demographics, for example, age group, education, race, employment status of the head of household, homeowner vs. renter, as well as geographic region of the U.S. Click here for the full report.
The other way to compare yourself to others is to join one of the personal finance social networking sites, such as www.NetWorthIQ.com, www.wesabe.com, www.covestor.com, www.zecco.com See my Yahoo!Finance piece for more on Geezeo and Mint. If you’ve been using one of these sites, I’d love to hear what you think, and whether the site has really helped you build wealth (or just made you realize you’re not alone out there!)
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January 10th, 2008 at 10:49 pm
Hello Laura, This is in response to your question about whether being a Covestor member has made any difference. I’m a small time 68 year old trader, still working a full time day job, which I’m going to need for a few more years. I’m a fairly active trader, and hope to build my modest IRA up for retirement. When I first read about Covestor, I was so taken with the idea that there would be an official audit trail of all trades in what is virtually real time, that I couldn’t wait to join. None of the other reasons really mattered very much. Although Covestor is planning on fee based trade sharing, I think of myself as fairly knowledgeable about trading, so the idea of getting trade ideas from anyone else seemed remote. And the thought that I might be on the other side of the ledger, having others follow me, also seemed unlikely. I was just taken with the idea of the challenge. As you have probably noticed, there are an infinite number of claims out there about how profitable past programs have been, and as many others claiming to be able to help you become wealthy, if you’ll just pay now for their predictions about the future. Covestor is about what’s happening with real money in the here and now. It’s an official audit trail. All the rest is hot air and a fiction.
About how this has been working for me: First, the bad news: I’m down about 3.5% since I joined in June. However, the benchmark that I selected to measure myself against, the Russell 2000, is down about 13.5%, so I guess I could be worse off. All the rest is good news.
The first benefit that I’ve experienced has been the exposure to a far wider range of ideas, perspectives, and trade ideas than I had anticipated. When I joined, I’d estimate that there were only a few dozen members. The membership now appears to be in the thousands, and many of the members are in countries all around the world.
If I had been asked beforehand whether I am open to new ideas, I would of course have said yes. But after coming into contact with such a wide range, I now think that I was thinking inside the box, and didn’t even realize it. Some specifics: I have broadened my horizons, in terms of the type of stocks that I consider. I used to focus almost exclusively on small cap value stocks. As a result of the performance and rationales of various Covestor members that I track, I’m now systematically also looking at large cap growth, and everything in between. At least two specific trade ideas that I got from other Covestor members have been among my best trades of the year. One was CHNR, and the other STP.
Another benefit is a bit less measurable, but quite real. Although I already have some fairly strong ideas about trading, I’ve been surprised at how many traders come at this from some other direction. And some of them are doing so well, and so consistently, that I’ve had to step back and rethink every idea I’ve ever had about trading. This is an ongoing process, which I believe has already helped me, especially in terms of discipline and flexibility. It’s helped me confirm the best ideas, and more comfortably reject others that have caused me to lose money in the past.
Related to trade ideas: many members have listed their favorite books. I thought I had read everything worth reading on trading, but have discovered quite a few books well worth reading, that I hadn’t even heard of. More than a few of the members are authors.
Lastly, although I didn’t really join Covestor for any sort of social experience, I have to admit, the ongoing exchange with other members has been worth a great deal. Those that are doing extra well have been surprisingly open about how they’re doing that. Some of these members are ultra successful professionals, and some are just gifted and experienced individuals. I have actually learned some things about trading, money management, stock selection, asset allocation, etc., that I didn’t know.
So, the bottom line is that Covestor has been a very rewarding experience for me. For anyone that’s already doing well, it could be a future source of profits. But you have to be able to demonstrate it with real money. And for any trader that might be looking for new trading ideas, Covestor members are loaded with those. I recommend the Covestor experience to anyone daring to put themselves on the line, and find out whether they’re really as good as they think they are.
Thanks for giving me a chance to air my views! Don Bartell
PS: you can see my own page on Covestor:
http://www.covestor.com/mbr/don_bartell