Determine your net worth
When preparing your initial financial plan, one of the first steps is to calculate your net worth. Simply put, this means figure out the value of everything you own (assets) and subtract everything you owe (liabilities). The result is your Net Worth (assets minus liabilities). If you have more assets than liabilities, you have a positive net worth. If you have more liabilities than assets, you have a negative net worth.
The result of this exercise gives you a picture of how much you would be worth (or how much money you would have) if you sold everything today. Hopefully, you can agree that this is an important fact to know. Also, Net Worth Statements are useful for other purposes, such as when applying for a mortgage, credit card, car loan, or college financial aid for your kids.
For a general idea of what your net worth should be, based on your age and income, check out the Expected Net Worth Calculator. While the results of the calculator are interesting, take this information with a grain of salt, since it's simply an average and doesn't take specific personal situations into account. If you want to know how you compare with others of a similar age and income, check out CNNMoney's net worth tool (based on 2005 data).
When preparing your Net Worth statement, organize your information into the following two categories:
- Checking and savings accounts
- Certificate of Deposits (CDs)
- Money Market Accounts
- U.S. Savings Bonds
- Mutual Funds
- Stocks, Bonds and Other Securities
- 401(k), 403(b), IRAs and Other Retirement Accounts
- Your Principal Residence
- Other Real Estate Owned
- Time Shares, Boats and RVs
- Closely Held Businesses and Partnership Interests
- Cash Value in a Life Insurance Policy
- Variable Annuities
- Credit Card Debts
- Student Loans
- Car Loans
- Mortgage(s) on Your Principal Residence
- Other Mortgages
- Home Equity Loans
- Other Consumer Debt
- Margin Within an Investment Account
To help you prepare your "Net Worth" Statement, you can use CNN Money's calculator. If you prefer, you can download a Microsoft Excel worksheet that you can use to compute your networth. For those that prefer to do this on paper, you can print out a Net Worth Worksheet.
Once you have completed your Net Worth Statement, check out how much you are worth. If the number is positive, give yourself a pat on the back and start planning on how to increase your net worth. If the number is negative (more liabilities than assets), you might appreciate the necessity of developing a financial plan now.
Step Four - Create or update your budget