Personal Finance: How to Calculate Your Net Worth

Hi everyone.

My posts thus far have mainly been focused on setting goals and taking ownership of our lives. I'll certainly be writing more about those topics, but I'd like to break into another topic area that is always on my mind.

Personal finance.

I want to be wealthy. I want you to be wealthy. It's something that I want not because I'm a very material person, but because I seek many of the comforts that financial stability brings. Financial stability brings with it reduced stress over financial matters and increased opportunities to do the things that we want.

In the hustle and bustle of modern life, becoming financially stable isn't an easy task. If it's something that you've struggled with, don't be ashamed. There are lots of activities, side-tracks and even generally-accepted bad behaviors that carry us away from financial stability. The road to financial stability is not an easy one; it's one that requires huge amounts of discipline and a certain amount of financial understanding. Financial stability doesn't happen overnight. It doesn't happen by just having a stable job. Financial stability and building true wealth takes time, long-term planning and a commitment to your own personal long-term wealth.

When it comes to analyzing my own financial position and charting my progress, there is one calculation that I think matters more than anything else:

Personal net worth.

There are literally thousands of financial formulas that a person can learn, but unless you can calculate your net worth, you're going to have a hard time understanding your own financial situation and growth.

So what is net worth? Simply put, net worth is just the grand total of an individual or organization's assets (cash, property) minus their liabilities (credit card debt, mortgages, etc). Calculating net worth only requires some basic additions and subtractions to complete. It's first grade stuff.

Why is calculating your net worth so useful? When you calculate your net worth, the resulting number gives you an idea of your financial position with all things considered. Let me give you an example of why this is so important and powerful.

Imagine that you have a friend named Frank. Frank bought a home a year ago for $200,000 and had $5500 cash in his bank account after the purchase. To purchase his home, Frank made a 5% down-payment and mortgaged the remainder. When he purchased his home, Frank told you how excited he was to start building wealth and how gratifying it is to be a home owner.

At present, a year after his home purchase, you bump into Frank again and ask him how he's enjoying his house. He's overjoyed with how things are working out for him. He tells you about how he got a raise at work after purchasing his home and has been able to pay down his mortgage principal by $10,000 in the last year. To celebrate, he has just bought himself a new car for $17000 with 0% down and took a month-long vacation to Europe at a cost of $4,000 which he billed to his credit card. Frank also tells you that he still has the $5500 saved in his bank account and feels that he is on a great financial path.

You smile cautiously at Frank and wish him a good day. You worry about his financial future.

Why do you worry? Let's calculate Frank's net worth to see what's what:

Year 1 Net Worth: Assets - Liabilities = ($200,000 + $5500) - $190,000 = $15,000
Year 2 Net Worth: Assets - Liabilities = ($200,000 + $5500) - ($180,000 - $17000 - $4000) = $4500

Even though it looks like Frank is living a pretty good life, he has managed to decrease his net worth by $10,500 or 70%. Frank doesn't know it, but his past year has been a financial disaster. To make matters worse, his use of his credit card and car purchase will have saddled him with additional interest payments that will lay waste to his income. Despite what he says, Frank is not on a great financial path. Frank is marching towards bankruptcy and financial ruin. Don't be Frank!

How to Calculate Your Net Worth

Frank's situation is a scary example, but it's one that you may not have to look very hard to find, even among people you know. What's most important about the example I've provided is not the numbers involved but the percentage change year over year. If you calculate your net worth on a regular basis you can use the resulting values to track your progress towards wealth and financial stability. Here's how:

Once again, the formula for calculating your net worth is simple:

Net Worth = Assets - Liabilities

When I calculate my own net worth, for clarity sake, I like to break Assets and Liabilities down into small things. Here's the template I typically use:

• Assets
• P - Real property - Your house, apartment, land, etc. I generally use the purchase price of the property for calculation sake. If you want to be fancy, you can correct the purchase price for inflation, but be cautious of using the market value as this can fluctuate violently if conditions turn poor.
• C - Cash - The money in your bank account. This should include money that you have set aside as savings.
• R - Retirement Savings - If you have a 401K or an RRSP, you can include the total balance as an asset. Even though these funds aren't available for your immediate use, they do form an important part of your growing net worth.
• S - Securities investments - Your stock, bond, etc. portfolio. Calculate the total market value of your current holdings.
• OA - Other assets - Vehicles, equipment, etc. Be cautious of how you value items that fit in this category. I often exclude it all together. If you purchased a car a year ago for $10,000, it likely wouldn't fetch the same price if resold. Items in this category will be subject to depreciation and you should depreciate their value as required before adding them to your net worth calculations. Exclude all together items that you own that depreciate rapidly or can become worthless rather suddenly. For example, if you just bought a $2000 laptop, you should consider that money as good as gone. Don't count it as an asset, because if it breaks or is lost, it's worthless to you.
• Liabilities
• M - Mortgages - If you own real estate, you may also have a mortgage. This is a huge liability against your net worth. Be certain to include the amount of remaining principal you have left to pay off in your net worth calculations.
• CC - Credit Card Debt - Credit cards are heavily used by many people. If you have credit card debt, you must include the remaining principal in your net worth calculations. Don't worry about including interest payments as liabilities, just consider what you owe. The impact of interest on your net worth will become very apparent as you calculate your net worth month over month.
• L - Loans - Student loans, home equity loans, car payments etc. Take the principal owing of all other loans you have and include them here.
• OD - Other debt - Personal loans, store credit, etc. If you owe any other money, be sure to include it here.

Obviously the above is just a guide. Use your judgement to create categories that suit your individual financial situation and always be conservative with your valuations of your assets. Based on the above, we can refine our formula to:

Net Worth = (P + C + R + S + OA) - (M + CC + L + OD)

Try calculating your own net worth right now. The result might surprise you.


When to Calculate your Net Worth

You can calculate your net worth as often as you like, but you should be sure to do it at least monthly. Over time, you net worth values will fluctuate as your financial position improves or worsens. What you want to see is that your financial decisions are creating growth in your net worth.

Calculating a percentage gain (or loss) against your net worth each month can be incredibly useful as you track your progress. Big purchases that you can't avoid or bad investment decisions might cause your net worth to fall, but your overall goal should be to see your net worth consistently grow. If you look at your net worth and see that month over month your net worth is growing by a few percentage points each month, you're on a good track.

Spreadsheet software such as Excel or Google Docs is a great way to record each month's net worth and calculate your growth. As with anything financial, use your net worth calculations to spot trends and identify opportunities for further growth and savings. Do it monthly, and I promise you'll find ways to improve your financial position and increase your net worth.

Trends to Watch For

As you calculate your net worth month over month, you'll begin to notice some trends. Here are a couple that may stand out:

• Interest payments
• If you have a mortgage or credit card debt, calculating your net worth will put the financial cancer of interest payments front and center in your life. If you make $3000 in a month in net income and know that your living expenses are $1000 a month, you would expect to see your net worth increase by $2000. If you have interest, it won't, and you'll know why. When you see the toll that interest takes on your net worth, I promise you'll be filled with motivation to pay down your debts.
• Securities investments
• If you have a stock market portfolio, you may see violent fluctuations in your net worth if the general market is performing poorly. Use this awareness to temper your stock investment decisions. If your stock positions could send your net worth into the negatives if the market faltered, consider revising your positions. Never put all your eggs in one basket.
• Cash
• If you have a lot of cash on hand, month after month, you'll likely start to recognize that it's not doing your net worth any favors. Cash in the bank doesn't grow quickly. If you have some to invest, research ways that you can use your cash to grow your net worth. You should always have some cash around for emergency situations (vehicle repairs, sickness, etc), but if you have a very swollen bank account, find a way to use the cash that will hasten your net worth growth.

You'll likely identify other trends as well. Study your net worth outcomes carefully.

Net worth is a simple formula with powerful implications. Use it!

Outlink: We're Making Less Than We Were Forty Years Ago

Hi, everyone.

For the most part, I plan to use this blog to share my own thoughts on self-improvement and prosperity. Occasionally though, I'll also pass along articles and other material of interest for your consumption.

While reading on AlterNet today, an article on the falling income of men caught my eye. I share this article not because it was a particularly gripping read, but because it draws attention to a trend I believe will only become more damaging in the years to come.

The cruel fact of the matter is that we're working harder and harder all the time, and apparently, making less than we have in years past. This is a disturbing trend. Every hard working individual, no matter their career, race or gender, deserves some level of prosperity and personal satisfaction; a reward I think more and more of us are being denied despite the sweat on our brow.

The article doesn't provide us any concrete solutions to this problem, but let us use it as a reminder of the importance of diligent financial planning, education and an unwavering commitment to using our limited resources in ways that will bring us the most happiness.

How Goals Help you Reach Your Dreams

Wow. This new year seems to be just flying by. I'm sure you feel the same.

On the tails of my last post, I've continued to think about goals and how they can help us become better people and reach our dreams. During these thoughts, it occurred to me that making goals is meaningless if you don't know what you want to accomplish in the first place. Goals may detail steps towards a better self, but they generally say very little about the broader dreams we have.

Consider personal fitness. Using the pattern for making goals I laid down in my previous post, a personal fitness goal might take the following form:

"Within the next 4 months, I will lose 10 lbs by not drinking soda and walking to work."

Read the goal again and consider this: What does a well-stated goal like the above actually say about the person who made it? It tells us that they want to lose 10 lbs, but it says little about what broader personal fitness dreams they have for themselves. A person wouldn't even make a goal to lose 10 pounds without first having the notion that their present weight is incongruent with their ideal self.

I believe that many people carry with them a mental image of their ideal self. This mental image may include information about how they want to look and act, what sort of wealth they would like, and so on. These mental images are a representation of the dreams we have for ourselves , and they are much larger and more complex than what can be encapsulated in a goal.

I don't want to overly emphasize body image, but as an example of what I'm talking about, picture your ideal physical self in your mind right now. If you're like many people, the image that you have of yourself isn't the way you look at present. I like to picture myself as a lean 200 lb man with thick arms, broad shoulders and great posture. I'm not that man. Not yet. But I do believe I could become him with enough work.

Does this mean that I should make a goal that says: "I would like to be a lean 200 lb man with thick arms, broad shoulders and great posture."?

Absolutely not!


As I argued in my previous post, a goal that lacks specificity and doesn't detail the "how" is a goal that won't take you very far. Goals need to be specific and they need to include some information about how they can be accomplished. In my opinion, they also need to be achievable in a time frame short enough to allow for regular reevaluation.

Therefore, my desire to be a lean 200 lbs is not a goal at all. It's much bigger than a goal; It's a dream I have for myself. We all have such dreams and I think it's important to know what they are before we start setting goals.

Dream Formation

Forming a dream can take time. Life is a journey with innumerable possibilities, and the distant horizon can be difficult to see at times. To further complicate our dreams, we change as time passes and desire different things over the years.

Dream formation starts when you permit yourself to think far beyond your present situation. A dream can feel larger than yourself and you needn't know all the steps required to achieve it. To form your dreams, start by asking yourself questions like: What do you most want to do? Where do you most want to go? What type of life would make you feel the most free?

Once you have a good picture in your mind about what you would like, find a way to cement your desire. Write your dream down for future reference. Create a 'dream board' full of pictures of the things you would like to achieve. Take steps that will help you keep your dream at the front of your mind.

Think of your dreams often, and use them to feed your goal-setting activities. Each goal you make should represent a step towards one of your dreams. This is why goals are so powerful; they represent specific, achievable steps towards what we truly desire.

Most importantly, never stop dreaming. Dreaming of what you want most can be a very invigorating experience. I've certainly found this to be the case in my own life. Dream big, and then use goal-setting to achieve all that you desire.

Making Better New Year's Resolutions

As we've just sailed past new years, everyone has New Year's resolutions on their mind. A quick read of popular media will reveal that everyone is abuzz about how they can make 2012 their best year yet. It makes sense, because the dawning of a new year is a great time to reflect and adjust.

The decision of whether to make New Year's resolutions or not always comes down to personal preference. Some people firmly believe that they're not a great idea, others unfailingly recommit themselves to self-betterment goals with each new year. For those of you who do make resolutions, I thought I'd share some thoughts on the matter.

I'm often startled at how often several common resolutions are featured in resolution lists. Think about it, how often have you seen (or used yourself) one or more of the following New Year's resolutions:

• Get into shape / lose weight.
• Get out of debt.
• Spend more time with friends.
• Take more time off work.
• Be better at managing time.

You've seen these before, haven't you.

Don't be ashamed if you've used one or more of the above yourself. Each one signifies a topic area in which innumerable people (present company included) desire improvement. There is absolutely nothing wrong with the topic areas that the above resolutions attempt to address. However, in my opinion, all of these resolutions, stated as they are, are severely lacking.

Let me explain.

Consider the worthy goal of getting out of debt. It's completely unquestionable that getting out of debt is a worthwhile goal to have, and it's perfect topic to create a resolution from. In my opinion though, in order to make such a resolution effective, we need to spend more time thinking about exactly what we want to achieve and how we're going to do it.

Be Specific About What You Want To Achieve
Creating a better New Year's resolution starts with being more specific. Desiring just to "get out of debt" is far too vague a goal to pursue. What is the time-frame? How much debt is there to pay down? How much progress could reasonably be made within the time-frame? All of these are crucial questions that should be answered when the resolution is formed. Without doing so, the person making the resolution is setting themselves on a course that is more likely to lead to failure and discouragement. Resolutions may not always be achieved, but they should always be achievable.

As you write your resolutions, consider stating them in a more specific manner and take steps to make sure that the goal you're making is both achievable and will encourage you to stretch yourself.

Getting back to our debt resolution, as an example, let's assume that I have $20,000 in credit card debt that I wanted to pay down. Let's also assume, that after my monthly expenses, I have $1000 left over. As this is credit card debt, I'm also aware that I will be subject to interest charges on the outstanding debt. I'm going to give myself a time-frame of one year to complete my goal.

Now I can form my resolution as follows:

"Within the next year, I will pay down my credit card debt to $8,000 or less."

A resolution like the above is far more specific than "get out of debt". By adding a few words, the resolution now contains a time-frame, a specific goal, and based on the parameters we thought through, we know it to be achievable. In addition, due to the added hurdle of handling the credit card interest expenses, we know that the resolution will still cause a sufficient quantity of strain to allow for personal growth.

Know (and Write Down) the 'How'
With our improved resolution in hand, we're ready to start thinking about the how. What must be done to achieve the goal?

Figuring out the how needn't be difficult. In fact, with a specific goal in place, it should be rather easy. Determining the how is just a matter of asking yourself questions similar to the following:

What steps must I take to achieve my goal?
What must I do to complete each step? 

Turning again to my sample debt-reduction resolution, the steps I must take include things like making regular payments, finding new ways to save money and avoiding spending money I don't have to.

My resolution becomes:

"Within the next year, I will pay down my credit card debt to $8,000 or less. I will do this by making bi-weekly payments, only purchasing what I need and finding one money-saving activity a week."

More details can be added as needed, but for the moment, my sample resolution is in good shape, and it has the ability to set me on a path destined for success. As you write your resolutions, think carefully about each one and state them in specific terms that are meaningful to you. A new year is a great time to adjust your course in life, so make it count.

Happy New Year! 

Maximizing Positive Outcomes

After writing my post yesterday on Making Recreation Count, I reflected on the importance of maximizing positive outcomes wherever possible. As it related to recreation, I talked about the importance of ensuring that recreation was high quality. That's one example of maximizing a positive outcome.

I'm leaving my previous post as is, but I feel that the importance of maximizing positive outcomes merits more discussion, because for people keen on improving their lives, it's an absolutely pivotal concept.

Consider the following phrase:

Maximize positive outcomes at all times.

It's a truism for people who want more of the best things in life. It's a phrase to live by. It's a principle that should never leave your mind.

In the financial world, terms like return on investment, dividends and profit are used to identify the positive outcomes of financial investment. These are important terms, and perhaps we'll discuss them some time, but right now I'd like to point out that because our society is so focused on commerce and financial gain, I feel that the discussion about other positive outcomes can get lost in the mix.

Don't get me wrong, I want to be financially wealthy. I want you to be financially wealthy. But I want prosperity and well-being in other areas of my life as well, and that's why I believe that maximizing positive outcomes at all times is so important.

So, how do we maximize positive outcomes?

Know What You Value

Before you can maximize positive outcomes in you life, you have to have a solid understanding of what you value in the first place. Value is such an important thing to consider throughout all areas of life. How do you decide what you value? A few pointers:

First, if you haven't already figured it out, let me draw your attention to the following:

'Value' is a word that is horrendously misused.

If you understand the word value the way that big-box stores use it, throw that definition in the bin right now. Value has nothing to do with money. If you go to the supermarket, you're sure to see brightly-colored signs in all directions exclaiming that something (24 pack of soda, family-sized box of cereal, etc.) is "great value". This isn't a true statement, because a sale price does not affect the underlying value of the goods being purchased, it only affects the price you buy it for. What the store is actually doing is adjusting the value for money fraction in such a way to make the product seem more attractive to the consumer.

"Value" actually refers to "the importance or preciousness of something". This is what you need to focus on. Think about your life, and think about what is most important and precious to you. These are the things that you value.

This brings me to my second point: Value is completely subjective. You have to take ownership of your life and decide what is important to you. No one, not me, your friends, your coworkers, your parents or anybody else can do this for you. You, and only you, have to decide what you value.

As an example, consider personal fitness. Personally, I value physical endurance. It's important to me because I thoroughly enjoy cycling and riding long distances requires endurance. It is precious to me because without it I may not be able to ride to some of the locations I enjoy riding to.

Does this mean that physical endurance should also be important to you? Absolutely not.

You see. Subjective.

Analyze what you value. Write it down if need be. Once you do that, you're ready to move on.

Think About Potential Outcomes

As you likely do as well, I spend a great deal of time analyzing the potential outcomes of the way I spend my time. When it comes to maximizing positive outcomes, I believe that it is important to consider thoroughly what we stand to gain (or lose) from a particular action. No amount of effort upfront will make an activity worthwhile if the outcomes are inherently invaluable, therefore, we must think about potential outcomes before we take action.

Consider each potential outcome carefully. Each outcome will carry with it a certain amount of value that will be contributed to your life if you achieve the outcome. Using the value judgements you arrived at earlier, you'll be able to decide which potential outcomes are the most attractive.

Maximize Positive Outcomes and Execute Your Plan

Once you've considered each potential outcome, you'll be well prepared to choose a course of action. The course of action that you pursue does not need to be driven by only one potential outcome. Your decision to take a particular course may be derived from the collective value you feel you will receive from pursuing several potential outcomes simultaneously.

This is really where the word maximize comes into this discussion. Remember, you're focused on maximizing positive outcomes. There is a great deal of opportunity for creativity to take place here because there is an infinite number of ways you can mix-n-mash your life to extract the most value.

Consider a typical Saturday. You get up in the morning and decide that you would like to have a bike ride, spend some time with your friends and take a nap.

Let's arbitrarily decide that the above desires have the following value scores.

• Nap - 5 value points / hour
• Bike Ride - 3 value points / hour
• Socialize with Friends - 6 value points / hour

Let's also dictate that you have a solid commitment later in the day and only have 2 hours to do the above.

What should you do?

If you choose hastily, you might decide to just pick the most valuable item (socializing) and do it for all the time that you have. Over your allotted 2 hours, this will net you a value outcome of 12.

However, if you focus on maximizing positive outcomes, you'll quickly realize that your desires are not mutually exclusive. You won't be able to nap and take a bike ride at the same time, and napping with friends doesn't won't allow you to socialize, but you can certainly invite your friends to come along for a bike ride. By focusing on maximizing positive outcomes, you've been able to discover a course of action that will provide you with the most benefit.

Let's say you spend 2 hours socializing with your friends, one hour of which you spent cycling with them. Now, over the allotted 2 hours, you have achieved a value outcome of 15. Yay!

I know I've given a silly example, but I hope it has helped to illustrate what I'm talking about. The cruel fact of the matter is that all of us are bound by time and resources. The repressiveness of these boundaries can (and should) be reduced over time as we improve our lives, but in the meantime it is crucial that we make the most of what we have. It's really important.

If you're not already maximizing positive outcomes in your life, give it a try. I've found it to have great utility in my day to day activities, and it helps me get the most value from my time and resources. It's the reason I listen to music while I cook. It's the reason that I go to the gym on my lunch break. It's the reason I'll never drive 30 minutes to the store just to use a coupon that saves me 50 cents.

Most importantly, it's what can help you do more of the things that you value most.