What is your net worth?
(Article by Annelena Lobb, CNN/Money Staff Writer, New York, August 15, 2002)
Knowing your net worth helps you evaluate saving and spending habits
and plan for the future.
Calculating your net worth sounds terrifying. The process boils your savings and expenses down to one lonely number. Frankly, you may not want to know. But taking a clear-eyed look at the value of your assets is one of the most important pieces of the financial planning puzzle. Not only does it tell you where you stand today, but it also gives you the building blocks you need to reach your goals tomorrow.
"Net worth is like a road map," said Phil Cook, a certified financial planner in Torrance, Calif. "If I'm heading from California to New York, I'll get there eventually if I just go east. But if I know where I am now, I have a map and can make corrections along the way, I can get to my destination much faster."
Many people are surprised to learn they have a negative net worth, said Carrie Cole, a certified financial planner in Dearborn, Mich., while others find they have more than they thought. "It's a very powerful self-portrait," Cole said. "I'd say the majority of my clients who do this end up amazed -- they just have no clue what their net worth is." Nor do they have a sense of how they stack up. The median net worth of someone age 25 to 34 in this country is about $22,000, while those age 35 to 44 are worth nearly $100,000, according to a 2001 market audit by Claritas. Persons 45 to 54 have a median net worth of $170,000; those 55 to 64 are worth the most at about $210,000, and those 65 and older have amassed a median net worth of $186,000.
The magic number
Net worth includes it all, down to the kitchen sink. You add up all your assets, from your 401(k) to your furniture. Then subtract your total liabilities from what you owe on the mortgage to the balance on your gas card. Some planners advise tallying your net worth once a year, as part of an annual financial check-up. Others say that's too much -- like an obsessive dieter, too much attention on calorie counting (or asset counting) makes you crazy.
In spite of the relatively simple math required, net worth can be difficult to calculate. The process gets complicated when you're forced to put a price on assets that have no obvious dollar value, for example, like furniture collectibles, said David R. Bergmann, a certified financial planner in Marina Del Rey, Calif. One word of advice: Try not to get too emotional about items with sentimental value -- the most common pitfall when figuring out the magic number. Your heirlooms aren't worth millions because they make you teary-eyed. "Everyone thinks their jewelry is worth thousands more than it actually is," Cook said.
Professional appraisals, which provide the fair market value, can be a big help there. And if you're really unsure about the value of your assets, a financial planner can usually help put things in perspective -- for a small fee. Once you've crunched the numbers, net worth lets you evaluate the way you spend and save your money. Those who find they're right on track see their money management strategy affirmed. Others, shocked to be in the red, realize habits have to change. "Knowing your net worth can be motivational," Cole said.
Net worth also, of course, helps you gauge liquidity, or the degree to which your assets are immediately available. As such, Cook said he asks clients to divide assets and liabilities into both current and long-term categories. "If you have $1 million in total assets, but only $10,000 in current assets, what happens if you get laid off?" Cook asked. "You see how quickly you could resolve short-term and long-term problems. And you know how leveraged you are. A person with $1 million in assets and $990,000 in liabilities has work to do."