How do you define your worth?

December 8, 2011 · 25 comments

During one of my Net Worth updates  a few months back, one of you made a comment along the lines of  “I don’t like to calculate my NW. I am more valuable than a number.”

I get that. No one is saying that your net worth defines the very essence of your character. But that doesn’t mean your net worth isn’t important

I post my net worth updates each month as a way to track my progress over the years. What I don’t want people doing, including you, is comparing your net worth to mine. You have a different income, different living situation, and different priorities than me. Who cares if my net worth went up more than yours, or if yours went up more than mine? As long as we are doing the best we can with the cards we’ve been dealt, nothing else matters.

Heck, we may not even have the same definition of Net Worth. You can see from my monthly updates I include the following items in our calculation:

  1. Checking Accounts
  2. Savings Accounts
  3. Roth IRA
  4. 401K
  5. Credit Card balance

That’s it. It usually only takes me a few minutes to crunch the numbers and see where we stand. This, however, might not be the most accurate reflection of our true net worth. For example, I have $5,000 sitting in a blogging account that I’ve ignored all year. Why? Because I know Girl Ninja and I are facing a huge tax bill this year and I will be giving all that money to Uncle Sam here in the next few months.

Or how about our cars. My car is worth around $11,000 and the wifey’s should sell for around $8,000. We owe nothing on them, so including these figures in our totals would give our NW a healthy bump by nearly $20,000.

Girl Ninja also has a retirement account set up through the San Diego School District that we have totally ignored (I’m really lazy and haven’t filled out the necessary paperwork to have it rolled to a private IRA). I think there’s about $3,000 in that account that I could include in our net worth, but until I’ve actually done my due diligence and rolled that sucker over, it’s like it doesn’t exist.

Lastly, if we wanted to be super intense, we could itemize all of our possessions and guesstimate their value.  Laptop $300, TV $600, Couch $1,000, etc. That sounds way to tedious and miserable for me to ever sit down and actually figure out, so I’ll just take a shot-in-the-dark and assume we have about $5,000 in miscellaneous possessions.

Moral of the story:

My NW updates are a quick way to see if GN and I are making good (or bad) progress towards our financial goals. Nothing more, nothing less. It’s definitely not the most accurate systems, but it works great for us.

Do you calculate your net worth semi-regularly? If so, what accounts/items do you include in your calculation? Is there anything you leave out of your NW, but you could include if you wanted?

p.s. I’ve posted this comic before, but it’s just too good to not repost today…

1 Emily Hunter

I don’t calculate my net worth, even though I find that it’s a useful number to have. I am SO concentrated on getting the credit card down that there’s really nothing else in my world right now. I find, though, that calculating the NW is useful from time to time – for me… equity in house just about balances the debt on the CC (not much equity on the house, just bought it 2 years ago). Definitely wanting to see a change in 2012.

2 Midwest

I include checking/savings/money market accounts, all investment accounts, mortgage, home equity, credit cards, student loans, and vehicles in my net worth calculations.

3 AMD @ amomsdime

I calculate my net worth quarterly. I find it a really good way to make sure I have all my assets and liabilities in one place. I also like it as a reminder that there are two ways to increase my net worth, so even though I may have a couple of months where we don’t save as much as I’d like, simply by paying off my mortgage/car loans helps push my net worth up by decreasing my liabilities.

My assets include:
1. House resale value (really I just keep what we purchased it for even though it has increased since then)
2. RRSPs (CDN version of 401k)
3. Stock (we have a little through hubby’s work)
4. Savings accounts (this includes our emergency fund and I’m thinking I might take that out as it’s only to be touched in case of emergency)
5. Car resale value (whatever autotraders.ca says we could resell for, updated each quarter)

Liabilities include:
1. Mortage
2. Car loan
3. First time buyer amount we have to pay back to our RRSPs

There are three things I don’t include in net worth.
1. Checking account-we use this to hold only the cash outlays we know will flow through in a month (mortgage payment, car payment etc. and throughout the month it can range from $2K to $2.00)
2. Credit cards-we pay them in full monthly as soon as our pay comes in closest to when they’re due…so we never count that income as part of our assets and if we included them our net worth would vary by $1K or $2K depending on what day we arbitrarily decided to calculate net worth (ie they day before they’re paid or the day after).
3. Pensions through work. Not only do I find this hard to calculate but I also must live life a little pessimistically as I don’t really count them. Mine is a defined contribution so who knows how much money will actually be in it when I want to retire, so I’d rather depend on myself and my RRSPs/savings. Hubby’s is a defined benefit so I should probably start including it.

4 Joe Plemon

I am pretty slovenly about tracking my net worth. I look my various accounts over each month, but I don’t add in the value of other assets (cars, household stuff, etc.) I suppose it just isn’t that important to me. My net worth, for sure, is not an indicator of my value as a person. I will leave that up to God, who loves His children unconditionally. Good thing!

5 Elle @Couple Money

We do a net worth review every month. We include bank accounts, retirement, car values, mortgage and the estimated appraised value, and the student loan.

My husband and I use the updates as a conversation starter about the past month – we went right, where we could improve on, and what we want to change. Especially the first couple of years, discussing our money habits regularly gave an insight about each other.

We agree on the big stuff (paying down debt, avoiding a car loan, saving before buying), but we have different styles.

6 JP

I do about the same as Ninja, track my major accounts monthly. I have a “Savings Goals” sheet and an “Actual Savings” sheet to compare if I am meeting my savings and net worth goals each month. I also don’t include possessions like my car, couch, etc.

7 Larry

What Ninja is doing is creating a personal balance sheet: assets – liabilities = equity, and he is including only his current assets (cash and investments) while excluding any fixed assets (car, furniture, etc.) A balance sheet is a snapshot of your financial situation as of a given date. So let’s say hypothetically that comes to $35K in cash, $65K in investments, and $5K in credit card debt as of Dec. 25, 2011, or a net worth of $95K.

So is it valid to exclude the car and furniture? In this case they affect the balance sheet only minimally, so we’ll ignore them. But let’s say next month he pays off the credit card and buys a condo for $150K with a down payment of $25K and a mortgage of $125K. Now as of Jan 31, 2012, his cash has dropped to $5K, his stocks remain the same, and his liabilities have increased to $125K. So is his net worth now $70K in assets – $125K in liabilities = negative $55K? No – because every debit must be balanced by a credit, and the value of the condo is added to the assets. So in reality, his assets as of that date are now $220K ($5K cash, $65K investments, $150K condo) and his liabilities 125K – for a net worth of $95K.

8 Guest

Reply to Larry, I don’t think Ninja is doing only current assets. His investments are all long term in nature as they are all in retirement accounts ( I believe). Might be able to say he is using only monetary assets, buy I forget the definition of that and whether that is right description of his split.

9 Larry

OK, I’ll buy that. By definition a current asset is one you could expect to convert to cash within a year. So you could have both short-term and long-term investments on the balance sheet, and so probably monetary assets and liabilities might be a better term for what I was trying to say. What he does not include on his balance sheet are depreciable fixed assets like his car or sofa.

10 StackingCash

I have a similar method like yours, Ninja. Checking plus savings minus bills. I just want to know if that is positive because that is what matters to me. I don’t like to factor in my house or cars because I cannot easily live without them. Also, because my retirement accounts, social security, and pension are not guaranteed, I don’t like to include those in my networth. I just want the hard numbers which I can control, not some guesswork number based on what my networth would be if I sold everything I owned.

11 Larry

Stack: “I don’t like to factor in my house or cars because I cannot easily live without them.”
They are still assets.

Stack: “Also, because my retirement accounts, social security, and pension are not guaranteed, I don’t like to include those in my networth.”
SS and pension don’t belong as you are not collecting them now; when you do so they will be income that will add to your cash on hand. A retirement account on the other hand is yours and yours alone. Its value may fluctuate over time, but it’s entirely valid at any point you compute your NW to include their current value on your personal balance sheet.

12 SWR

Because of student loan living, I don’t really consider us to have a net worth- we’re in a holding pattern.

We have a tiny investment portfolio that we check up on monthly and a car loan that we are paying down that we track the balance on, but at this point in our lives we’re more about the budgeting.

13 C

Student loan living means living off student loans, I assume.

The only reason I was able to have an apartment in college was because I paid for it with student loans. Now that I’m out of school and there’s no more money coming, I can’t afford to move out of my mom’s house, because I work only two days a week.

14 Kristin

I include a lot of things! I have listed in my calculations: bank accounts, credit cards, investment accounts, savings bonds, car, cash on hand, gift cards, my FSA account, special accounts/deposits, and pending checks.

When I moved into my current apartment, I needed a 1 month rent security deposit and a $25 deposit for the building key. I should get those back when I move out unless something drastic occurs, and it’s currently sitting in an escrow account earning a tiny amount of interest, so I count it. I keep the gift cards and certificates on there so that when I do spend them, it doesn’t mess up my inflow/outflow. Tracking my FSA account let me know how much I had put in vs. how much I had spent so that I didn’t accidentally go over for the year. My “pending checks” or debts reflect whether I’ve written my rent check for the month that could get cashed any moment, or whether I’ve bought something that will be reimbursed later. Kind of cop-out way to balance my checkbook since the internetz do most of that for me. I entered all the savings bonds I’ve gotten for Christmas, birthdays, and science fairs on the Treasury website to watch their value grow. Most of these I look at every month, except for the car value. This all sounds quite complicated, but it’s not too bad! It basically keeps everything that I will need to pay attention to at some point in one spot. For instance, before I tracked this stuff, I had a $50 traveler’s cheque that I’ve had for probably 8 years sitting in a desk drawer somewhere. Now I keep reminding myself I need to find somewhere to spend it so that it doesn’t get lost again.

When I moved out of my parent’s place and bought a bedroom set, I also sat down and made a list of my major possessions and a guess at their value to try to figure out how much renter’s insurance I would need. I don’t include that number in my calculations as it’s just a guesstimate, highly variable, and I’m not really planning on selling any of them. However, I do think it’s good to know in case the worst somehow happened and I lost everything. I check the Kelly Blue Book value of my car every few months so that I know what its value is should I ever need major repairs and I can see how much of the car’s value I am spending in the care and feeding of it every year. Since that’s a number defined by someone else, doesn’t change too quickly, and I could live without a car right now if I had to, I include it.

15 Happy Homeowner

I track mine monthly and include retirement, savings, property value, mortgage, student loans, and car value. I like to watch the number grow because to me it’s a sign of how far I’ve come (~4 years ago it was negative 30K, now it’s positive ~94K).

16 Larry

This is a good little tool:
http://www.smartmoney.com/personal-finance/estateplanning/the-net-worth-calculator-8003/

I see (to amend what I wrote above) that this calculator includes the cash value of a pension. I’m not extremely familiar with pensions as I’ve never worked at a job that offered one.

17 StackingCash

Aha! I’m not alone in thinking a pension could be a part of one’s networth. I also still believe social security is a factor but because it is “out of my hands,” I don’t figure it in my networth. As far as retirement accounts, most of them consists of the stock and/or bond markets. Because I’m sure you know where I’m comming from, a retirement account is actually controlled by those who control the markets *wink wink* therefore I don’t include them in my networth. :)

18 Larry

If you look at that calculator, however, you’ll see it refers to the “cash value of a pension,” which means simply what you could get in cash if you took your pension as of today. That obviously could be a great deal less than if you waited for retirement age (just as under current law, you earn an 8% increase in social security benefits between ages 62 and 70).

As for retirement accounts, whether they’re all in stocks, bonds, money market, or some combination, they are still your own funds (up to the point you are vested, which often applies to 401ks), and you could cash them out at any time (though if you do so you may well incur taxes and penalties depending on your age). So you can “wink wink” all you like; they are still part of your net worth. You will sometimes hear the notion that “your net worth is an illusion” unless you have it all ofrmost of it in cash. But that’s nonsense. Your net worth is a balance sheet, and a balance sheet is a snapshot of your financial position at a specific point in time. Doesn’t matter if you have $50K in retirement one day ant $10K the next; the account still forms part of your net worth.

All that said, I think there is still good reason to compute your net worth both with and without your home and other fixed assets. The problem is that those fixed assets, your home especially, are generally illiquid. Unfortunately most Americans’ net worth largely consists of their home. But unless you also have adequate monetary assets and low debt, you’re not likely to fund a successful retirement.

19 bethh

I don’t track my total net worth. I find it more motivating to track my non-retirement standing, and I don’t worry about figuring out the cash value of my assets. I don’t have a house or mortgage so mine is pretty easy to figure: cash in bank less any debts. I just take a look at the end of each year.

At the end of 2007 I was negative about 5k; end of 2008, I was just barely in the positive; at the end of 2009 it was around 5k; end of 2010 it was 10k. It was crazy motivating to go from negative to 3-figure to 4-figure to 5-figure non-retirement net worth over four years!

20 Melissa

I completely, 100% agree that my worth as a person is in no way reflected in my net worth. At all.

That said, someone who doesn’t keep tabs on his or her net worth regularly is just burying their head in the sand. Yeah, it’s not a measure of your value, but it’s still an indicator of your financial standing and progress.

I use Mint.com for my finances, which calculates my net worth for me, so I just check in once in a while and see where it’s at. It’s usually not a surprise to me when it goes up or down. (Actually hasn’t gone down ever. Yay!) Included is just my savings accounts and retirement accounts. I don’t have a car, a mortgage or any debt, so it’s super easy to calculate. I don’t include my credit card balance or the balance in my chequing account, because my credit card gets paid off every month, and I usually don’t have more than a couple hundred dollars in my chequing account at any time, unless it has specifically been earmarked to pay off my credit card balance or pay my rent.

21 Matt, Tao of Unfear

I don’t calculate my net worth, so to speak, but Mint does it for me with all of the accounts I have in there. I’m in the negatives, but I haven’t been out of school for very long. The only debt I have is school loans, and I have a good chunk in savings to balance it out. I’m not trying to measure up to you and other PF bloggers that post NW updates. But, I am inspired by the numbers you throw up. I know that i can be there some day.

22 krantcents

Although I do calculate my net worth often, I am more concerned with my return on investment. I am trying to grow my net worth after all.

23 Norman

I calculate my net worth quarterly, more often than that doesn’t help since it wouldn’t really change that much on a monthly basis. I particularly pay attention to the end-of-year calculation. I include checking, savings, investment accounts, and retirement accounts such as IRAs and 401K, and house. Notice, I ddin’t say minus liabilities, because I have none! yeah! I also think its fun to look back at my spreadsheets and see how I compare year to year.

24 Drew @ EpicFinances.com

I actually avoid thinking about net worth because there are too many factors for me. My appraisal on my home says I have $40k in equity, which is insane. I actually have $20k-ish, but thats just it.. I have no idea how much. I keep a tally of my bank account and thats about it.

As for your $5000 account for your blog — I assume you are doing quarterlys since this is a business, be careful that you don’t just assume “I paid more this year than last” to avoid penalties, I have to believe you pass the sustained business testing (that it is intended for profit)

Note: This is a warning, not specific tax advise. Consult a professional.

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