Step 1: How to Compute Your Net Worth

Now going back to the Steps of Setting our Financial Goal, we start with step 1 which is:
"How to compute your Net Worth"

I know a lot of people hate the subject of accounting (that includes my wife), but it is a necessity when it comes to taking control of our financial life. Although in this section we will discuss a few points in accounting but we will discuss it the simplest and practical way I can possibly explain.


Net worth is simply defined as your Assets less your Liabilities. To make things simple, "it is what you own minus what you owe". For example, if the total of what I owned is 1million and I owe 500thousand, my total net worth is also 500thousand. Now to complete the financial planning guide that you need, it is better that I give you an example done in a bit of accounting format.

Let's say Mr. Tony Stark (watch Iron Man 2 Trailer if you want click here) has the following assets:

Home -------------------------------------------------- $ 13, 500.00
Mutual Fund Investments ------------------------------ 5, 500.00
Personal Savings ---------------------------------------- 1, 200.00
Car (current market value) ----------------------------- 650.00
Fixtures and Furniture ---------------------------------- 850.00
Retirement funds ---------------------------------------- 6, 500.00

Total Assets --------------------------------------------$ 28, 200.00

Liabilities:

Car loan balance ---------------------------------------- $ 150.00
Credit card loan ----------------------------------------- 3, 400.00
Amortization balance (split 2yrs more) ------------------ 6, 890.00
Retirement Plan Balance (5yrs more to full -------------- 1, 200.00
Education loan ------------------------------------------ 799.00

Total Liabilities ---------------------------------------$ 12, 439.00

Mr. Stark's Net worth = $ 28, 200.00 - 12, 439.00 = $ 15, 761.00


Now it's really nice to think that everyone around the world will have this kind of net worth, wherein gaining financial freedom will be a lot easier given the positive net worth, however, in most people's financial statement, their net worth shows a negative value.

I think it doesn't matter whether you're from Melbourne, Australia or Cebu, Philippines as long as you have a positive net worth, moving to financial freedom is easier. It is also important to note that in the financial statement above, Mr. Stark did not borrow too much money just to buy liabilities, instead he borrowed for an educational loan, a housing loan and a small credit card loan.

The above example only shows that Mr. Stark has good financial literacy and knows his limits when borrowing money. In looking after your finances it is very important to plan your expenses so that you don't end up buying your wants, instead you buy what you really need.

Moving forward...

Computing your net worth is a very crucial part of your financial growth. I personally do this every start of the month to check on whether my net worth has increased or decreased, so that I can do necessary corrective action.

This is my suggestion for you. If you find yourself too biased or find it too complicated to compute your net worth, hire someone who can or if you don't have the extra money to do so, look for an accountant who is retired and ask him for a detailed advice.

Now go and start computing your net worth, and as soon you do comeback to this blog for the next financial planning steps.

Step 1: How to Compute Your Net Worth