Calculating Your Net Worth
You're an expert in how much you make and how much you spend, but for most people how much you're worth fall by the wayside.
If you don't know how much you're worth, it's hard to gauge goals and how good or bad your current financial situation is.
How would you calculate net worth?
It's quite simple actually. Just add up everything you own (assets) and subtract everything you owe (liabilities) and you'll have your net worth. Net worth can be either positive or negative. Hopefully, it's positive.
So what are assets?
Things like real estate is a good starting point. Your house, or condo, or even land is worth something. Problem is how do you calculate the value of your home? Some people take their purchase price and increase that amount each year by the rate of inflation. So if you purchased your house for $250,000 5 years ago, and inflation each year was 2% (nice easy number), then you'll need to multiply 250,000 by 1.02 five times and you'll get a final number of $276,020.
Alternatively, some people look in their neighbourhood for comparables. That is check out the selling prices of homes in the same area of a house that is similar to yours. Bedrooms, bathrooms, finished basements, etc. This is harder to do unless you enlist the help of a real estate agent. Alternatively, you can go to mls.ca and take a look of the listed prices of homes in your area. Keep a note of these homes and addresses. Eventually, when the real estate agents send out flyers, they may advertise something along the lines of "sold over asking" or "sold for 99% of asking". Take this information and you'll be figure out the estimated selling price of the home. Additionally, some flyers sent by real estate agents will contain generic statistics or average selling prices for a specific time period. Generally, they advertise these statistics by quarter.
What other things are assets?
Well, cash is the next obvious. Total the amounts for all of your bank accounts and cash you have at home. Do you have Government savings bonds or GICs? You can add those up too. Did you loan money to friends or family? You could add that up as an asset. However, if I lend money to family (I rarely lend money to friends), then I consider the money gone. If I get the money back, great.
What else are considered assets?
Investments and pensions come to mind. That's worth something right? Company stocks, mutual funds, ETFs, commodities, etc. are all things that are worth something. Just take the market value of your investments and include them in your total. Some people say to take the book value, the amount you put into the investments. I don't think that is correct. If your investments are down 20%, then it's not worth the $10,000 you put into it. It's worth $8,000. Conversely, if your investments are up 20%, then it's worth $12,000.
Well, some people consider automobiles an asset. Just go to Kijiji or Auto Trader and look for cars similar to yours and add that into your assets column. Personally, I don't consider the value of my cars as an asset. The value of cars generally goes down. Theoretically, I can get money for the cars if I sell them, but I'm not selling them and they are costing me money each month.
Finally, we can talk about the junk lying around your house. If money was really tight. How much can you sell your tablet, or TV, or smart phone? I don't count any of these things in my asset calculations, though. Sure you might have paid $700 for your smart phone, but do you really expect to sell it for $500 when you upgrade it to the latest version? If you really want to list these things, ebay.ca or Kijiji is a good.
Now that we have assets covered, what are liabilities?
The big one most people have is the mortgage. Generally, that's the biggest liability people have. Line of credit comes to mind as well. Credit card debt, student loan debt, money owed to family or friends are also other liabilities. Car loans are another form of debt. Did you borrow money to purchase your investments (also known as leveraging)? That's a liability.
Now that we have totals for our assets and liabilities, we subtract liabilities from assets to calculate our net worth. Tada! That's it.
Let's do a typical example.
Joe Random has a home worth $250,000 and a mortgage of $200,000. He still has student loans of $25,000 and has an emergency fund of $2,000. His bank accounts have a combined $1,000 and he has credit card debt of $10,000. He also has a line of credit balance with his bank for $5,000. At the company he works at, he's been fortunate in that he has $50,000 of company stock. Finally, his investments outside work are worth $30,000. However, he leveraged $25,000 to purchase those investments.
Well, let's grab the assets first. Home of $250,000, emergency fund of $2,000, bank account of $1,000, company stock of $50,000, and $30,000 of investments. His total for assets are $333,000.
Now let's total his liabilities. Mortgage of $200,000, student loans of $25,000, credit card debt of $10,000, line of credit of $5,000, and leverage (not sure the right term as I haven't leveraged) of $25,000. His total for liabilities are $265,000.
Subtracting liabilities from assets gives us a net worth of $68,000. Is that good or bad? No idea. Depends on many factors that I won't get into here.
That wasn't too bad. How about another example?
Josie Shopper has a condo worth $200,000 and a mortgage of $190,000. She has $500 in her bank account, student debt of $30,000, credit card debt of $25,000, a brand new car worth $40,000 with a car loan of $50,000 (new cars depreciate at least 20% once you drive off the dealer's lot). She has $30,000 in her company RRSP and has mutual funds worth $15,000. Unfortunately for her, she borrowed $20,000 to purchased her mutual funds.
If we total her assets, $200,000 for the condo, $500 for cash, $40,000 for the car, $30,000 for her RRSP, and $15,000 for her mutual funds, her assets are $285,500.
Now if we total her liabilities, $190,000 for the mortgage, $30,000 for student loans, $25,000 for credit card debt, $50,000 of car loans, and $20,000 to purchase her mutual funds, she has total liabilities of $315,000.
Subtracting liabilities from assets yields -$29,500. Yikes! It's negative! That means even if she sold everything, she'd still owe almost $30,000!
This situation isn't as far fetched as it may seem as Canada's debt loads are continually increasing.
In any case, if Josie calculated her net worth, it may be a wake up call to change her financial circumstances.
Good or bad, it's important to calculate your net worth from time to time. That way you'll know how close you are to your goals whether it is early retirement or enough net worth to join some secret society.