Simon’s Notes

Its a little hard to know where you’re going if you have no idea of where you’re at. Its not that difficult to figure out exactly what you’re worth. It might surprise you when you actually get this stuff down on paper, in a good way, or maybe for some in a bad way.

Getting a good picture of what you’re worth is pretty straightforward, you get all your assets down on one side and put all your liabilities on the other which you then deduct from your assets to get your total net worth. Its very easy to make a simple form in excel to speed the process along, or you could even do it on paper as long as you don’t lose it. The part that’s a little more complicated for some people is determining what is an asset or liability.

In simple terms, an asset puts money in your pocket and a liability takes money out of your pocket. But what about a house, which the bank normally classifies as an asset? Its easy to think that something like a house is obviously an asset, but lets examine this a bit. Is the house putting money in your pocket or is it taking money out. If you’re paying a mortgage on a house that you’re living in, then money is going out of your pocket. But if you own a second home that you’re renting out, that would be putting money in your pocket.

I could go on a whole other trail now, but I’ll leave that for another post, lets just say that you have to be careful when calculating your net worth, that you’re not paining a false picture, and creating a false sense of security. For the sake of simplicity forget about the house, consider the remaining loan as a liability, and consider the equity you’ve built up as an asset, in other words the amount of money that the bank is willing to loan you against the house would be considered an asset.

Another thing to be careful of is the true value of your asset. If you bought something at a certain price like a car, then you have to devalue it accordingly when checking your net worth. If you don’t do this you could easily end up with a figure that’s not true. There are lots of fancy ways to devalue things like cars and factory machines and so on, but I have a very simple trick, I just check the going price for the item. Look in your local newspaper for similar items and see what everybody is selling it for, and you’ll get a pretty good idea of the current value.

Why is it important to calculate your net worth? Well there’s many reasons, the most obvious being that you want to keep close records of your financial life if you want to become financially free, its hard to know what you want if you don’t know what you have. Another reason is that sometimes we accumulate a lot of unnecessary things, so when you write down exactly what you have you might find out that you have more than you thought. This becomes quite useful when you’re looking to buy that new sound system but you’re not sure where the money is going to come from, you’d be surprised.

Simon

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Filed under: Money and Finances by Simon Rodrigues