Calculating your net worth and documenting it through a Net Worth Statement is a useful tool for determining your financial health and comparing your current net worth against previous assessments can help you see if your overall financial position is improving or not. However, in order for this tool to work, your net worth assessment has to be accurate. In this article we look at what you should take into consideration to calculate your gross worth, or your present holdings before subtracting your current liabilities. In general, you want to assess your gross value conservatively as it is better to understate your value than to overstate it .
Most people tend to begin by listing their largest assets first just because it is easier. These tend to be illiquid: your home and other properties, major vehicles, and perhaps large retirement plans (IRA, 401(k), etc.). For real estate, be sure that you assess the value not based on what you paid, but on the current market value of the property. If, for example, you are assessing the value of your real estate on the going rate in 2006 – before the real estate bubble crash – then you are probably misrepresenting your value. The same is true for your vehicles; see what other, comparable, vehicles are going for in your local market to assign it a realistic value. Luckily, most retirement plans provide a solid cash value on your statement, so it is easy to see the value Net Worth .
After your largest items, you will want to consider all of your current liquid holdings. These are holdings in cash or cash equivalents that you can access almost immediately. Your liquid holdings would be any cash on hand, the amounts in your checking and savings accounts, money in stock portfolios and mutual funds, CDs, and some retirement accounts that you have immediate access to (like Roth IRAs). All of these liquid amounts should be very easy to properly assess the value of as they tend to be valued in cash terms.
After your large illiquid holdings and your liquid amounts; next you will want to look at other assets. The general rule here is to only consider items that can be realistically sold for $500 or more, but this is not essential. What is most important is making sure you only consider things that you can realistically resale and assigning them a value based on a realistic resale amount. These can include many things: home theaters systems, coin collections, musical instruments, fine silverware, and so on and so forth. This would not include things that perhaps you spent a lot of money on but has a very low resale value, like books, your music or DVD collection, computers, and the like. Just because you spent a lot for an item when it was new, does not mean that you could realistically resale it at anywhere close to the same amount.
Once you have everything in the three categories described above listed and have assigned them values, you just add all these values together to determine your gross worth. This should include all of your major holdings and property, but just to be sure, always go back over everything to make sure you did not overlook something. This can be a common problem with holdings that you do not really deal with frequently, like an employer stock purchase plan. Remember that in all of the above, in order to make your Net Worth Statement truly representative, you should always assess things as accurately as possible and if there is some leeway, err on the side of a conservative – or lower – estimate as opposed to a higher one.