Saturday, April 5, 2008

How I Calculate My Net Worth

Today we are going to look at how I calculate my net worth, and how you too can do the same.

Definition

Net worth is defined as:

Net Worth= Assets-Liabilities

A liability is anything on which you owe money. It could be a credit card balance, car loan, mortgage, money you owe a friend etc. An asset is anything you own that has a dollar value. This could be a home, a car, cash in a savings account, stocks, bonds, baseball cards, etc. The list of both assets and liabilities can be long and varied.

Now some people would say a car or a home is not an asset. Robert Kiyosaki, from Rich Dad Poor Dad, believes a home is not an asset but a liability. Why? He defines an asset as something that generates positive cash flow for you. If it is not generating positive cash flow, then it is not an asset. He believes a home is a liability because it is costing you money in mortgage payments, property taxes, upkeep, etc. Most people though, consider a home or a car an asset because they have a market value and if they sell it they receive money in return. I fall into this latter camp of thinking.

An Example

As an example, here is my net worth statement from Jan.1/08

Net Worth Statement Date: Jan.1/08
Assets Value
Liabilities Value
Home $0.00
Bike loan $9,043.55
RBC $4,934.91
Visa $0.00
Shareowner $7,356.73


Bike $7,000.00


Car $2,200.00


Etrade $1,072.51


ICICI $3,022.43


Sunlife $1,543.49







Total $27,130.07
Total $9,043.55










Net Worth $18,086.52



Now, my net worth statement needs some explaining. Normally one would list assets, such as a home, stocks, bonds, cash, mutual funds, etc. This makes it easier to see your asset allocation, which is good to know. I have done things a little different and listed assets by the different accounts i have, such as Sunlife or Etrade. I find this easier as i just go in and grab the numbers from the different accounts to calculate my net worth. I am not concerned with my asset allocation on my net worth statement, as all i am looking for is my net worth. You will probably want to list your assets under their proper asset allocation though.

Determining Values

You may be asking how I determine the value of my vehicles when i list them in the asset column. Easy. I just go online and check out the auto trader or ebay to find an asking price for my model of vehicle. Not obviously this is not totally accurate, as what people ask for the vehicles and what they get can be two different things. I think this provides a good rough idea of what my bike and car are worth though. The only true way to find out what they are worth, would be to sell them, and i'm not going to do that! If i owned a home i would do the same thing and check prices of homes in my neighborhood or go online and check the MLS for homes similar to mine in my community.

How Often?

How often should you calculate your net worth? I have seen other blogs where they calculate net worth once a month. Personally, I don't think it is necessary to do it this often. It reminds me of the person who checks if their stocks are up or down every day. Once a year or once every six months is enough to give you an idea of how your net worth is doing. Ideally, it will be going up and not down! If it is not going up, you should be asking why? I calculate my net worth once every six months.

Net worth is an easy calculation and gives you some insight into how you are doing financially.

2 comments:

Roger S. said...

What are your impressions of Shareowner services? I am looking forward using them, but since they are not well known, I have difficulty finding reviews/comments about it.

Would you still open an account today if you were given the opportunity to change some of your financial decisions?

Thanks

gixxerguy said...

I have been very happy with Shareowner. The co-op trade feature is great and only costs $9 to buy, a great price for someone who is just starting out. The fact you get fractional shares reinvested is also great. I have dealt with customer service a couple of times and they have done a good job. One drawback, they only deal with larger caps and ETF's. There are no smaller caps and not all ETF's are available. I would look at Questrade as well, they have great pricing. I have not dealt with them personally though.

Shareowner would be on my short list if I was making a decision today.