6 Steps to Reach Financial Freedom: Step 1


Understanding Your Net Worth

Your net worth is simply what you own after subtracting what you owe. It’s basic math, but understanding your net worth is critical to assessing your financial health and working towards your financial goals. Calculating your net worth is a straightforward process–simply add up your assets and subtract your liabilities.

Getting on track
Many women don’t know their net worth, but it’s a revealing snapshot of how years of spending habits affect financial health. Jennifer, a young professional living in San Francisco, figured out her net worth and discovered she had excessive credit card debt and too much money languishing in a low-interest savings account. It inspired her to pay cash for a new computer–a computer she was planning to charge on her credit card because it seemed expensive. Today, her computer is a real asset instead of a liability she might have spent years paying off.

The importance of net worth
Whether you’re planning major purchases or saving for your retirement, your net worth is vital information. Here’s why:

  • Getting a grasp on your net worth is the first step in reorganizing and rebuilding your finances. If you are in debt, what’s most important is to turn it around and start saving.
  • Before you can reach for a financial goal, you need to know where you stand today. Your net worth is a reference point on your financial road map. Once you know your net worth, you can set a budget for realizing your goals.
  • You’ll be better able to protect your assets. Determining the worth of your valuables is not only necessary to figuring your net worth, it also helps you get the proper insurance coverage.

On the plus side
The “plus” column consists of your assets. For instance:

  • Home
  • Car
  • 401(k)s, IRAs, and pensions
  • Stocks, bonds, and mutual funds
  • Artwork
  • Jewelry
  • Collectibles
  • Cash value of life insurance

Don’t include a future inheritance because you can’t count on it. The same goes for future paychecks. You want to tally only those assets and debts you have right now.

Your home is probably your biggest asset and your mortgage your biggest liability. Be sure to get an accurate estimate for what your house is worth by researching what comparable homes are currently selling for in your neighborhood. If you want to be really accurate, subtract 7% from the price you think your home is worth to cover the broker’s commission and other costs of sale.

On the minus side
The following items belong in your “minus” column:

  • Car loan
  • Home mortgage
  • Student loans
  • IRS debt
  • Credit card debt

Credit card debt is often overlooked, but it is every bit as real as a home loan and can be more dangerous to your financial health if you carry large balances from month to month.