It’s no secret that we actively track the PoP net worth, and find it very motivating to do so. And since we’ve been doing it so long, it takes me about 5-10 minutes to update it each month. But sometimes when you’re just starting out figuring out what goes into your net worth calculations and what you probably want to leave out isn’t 100% straightforward. So we’ve got a few rules of thumb that we use.
Quick Net Worth Review:
I think some people get afraid of calculating their net worth because they are afraid if it’s too low (or negative) that it means they are not worthwhile in the same way that someone whose net worth is positive might be. NOT TRUE. Your net worth is not an indicator of your worth as a person. (Read that a few more times if it didn’t sink in.) Dollar values cannot be placed on love, moral compasses or friendship, and none of those play any role in the net worth calculation.
At its heart, your net worth calculation is just a measure of the monetary value of things. It is found by adding up the value of everything you own (your assets) and subtracting off the value of all of everything you owe (your liabilities).
Net Worth = All of Your Assets – All of Your Liability
Since no one wants to start by taking inventory of their sock drawer, where do we start?
Must Include All Liabilities
Get the painful stuff out of the way first. Since underestimating your liabilities is only going to fool you into over estimating your net worth, so include every last cent you might owe.
- Secured Debt – mortgages, car loans, boat loans, all of it
- Unsecured Debt – student loans, credit cards (even if you pay it off in full every month – include the current balance), personal loans, outstanding bills and payment plans
- Leverage – if you’ve used leverage in a brokerage account, you have technically borrowed from your broker, so be cognizant of this!
You may even have more liabilities than those I mentioned here. Rack your brain and make sure you’re not forgetting about $5K that your parents are expecting to be paid back or an outstanding bill to your dentist!
Assets Have More Flexibility
Excluding an asset is going to underestimate your net worth, which is far less serious an error than overestimating it, so you get a bit more leeway for choice here. But we consider four categories “Must Include” for assets.
Must Include Assets
- Cash and Cash Equivalents – Here I’m talking about all checking accounts, savings accounts, retirement and other brokerage accounts that can be relatively quickly turned into cash in your pocket if necessary. Everything that you get a statement from, with your current value. I’d also include here things like a cash out value for a pension or an annuity. If you’ve got a “whole life” insurance policy, that should have a cash out value like a pension, so you can include it here as well since it is technically an investment. I highly recommend putting all of these accounts into a central place like mint.com so you can login with 1 username and password and see the balances of them all at once.
- If There’s a Liability To Match It – If you’ve got a home loan or a car loan, you definitely want to include the values of the home or car in your assets to balance out those liabilities. For cars, we suggest kbb.com. For homes, Zillow sucks, but you can use it as a first pass. A better way is to complete your own market comparable analysis to determine your home’s value.
- If There’s A Strong Likelihood That You’ll Sell It – We don’t owe anything on Mr. PoP’s car, but we still include it in our net worth since its value is high enough that we would sell it to roll the value into his next car if we needed a different car.
- If You Have To Pay Taxes On Its Value Regularly – This is kindof an extension of #2. Taxes on property, homes, registered vehicles, boats, etc are all liabilities in a sense so you should include the assets that incur these liabilities.
Optional Inclusion: “Couch Cushion Assets”
Much like the change that you might be able to find in your couch cushion, a couch cushion asset is something that you technically own, but since it’s not in a bank account, you don’t really account for it. They tend to be hard to really know exactly how much they are worth, but if push came to shove you could get some value out of it by selling.
We tend not to include any couch cushion assets on our balance sheet, but if you’re short on big assets and don’t want to feel quite as dire, look around at some of your own couch cushion assets.
Some of our couch cushion assets are:
- Mr. PoP’s old car that currently resides in his parents’ barn. It’s too old to track the value on kbb.com, and we don’t have it registered anymore, so it’s not costing us anything to leave it there… but it could probably be sold for $1K… maybe?
- Family Heirlooms/Furniture/Jewelry – Since Mr. PoP was very much raised in a “buy it for life” household, a lot of the hand-me-down furniture and family heirlooms that were gifted to us are probably worth something, but we have no intention of ever liquidating these, so we don’t like to include them.
Don’t Include: Expected Future Earnings/Value
If you’re just starting out, it can be really tempting to want to offset student loans with the present value of expected future earnings. But as tempting as that may be, you cannot sell your education to someone else in the same way you can sell them an antique piece of furniture. While it has value to you, that value is not directly transferable without your own efforts.
In much the same way, even though the discounted cash flow (DCF) analysis of our duplex tells us that the present value of the cash flow it will generate is much higher than the current market comparable sales, if we were to list it for sale, it would be the current market comparable sales that would determine the price, not our DCF analysis.
So that’s it. I know it can sound like a lot when you do it the first time, but the truth is, once you get in the habit – it takes just a few minutes to update it once a month. And it is a huge motivator in keeping us on track financially.
So who’s going to give it a try and calculate their net worth this weekend? Let us know if you succeed! And don’t hesitate to ask questions in the comments if you need any help!