Knowing Your Net Worth Can Help You Plan

Your boss doesn’t know your value, right? But do you even know it? Most people have never taken the time to figure their net worth even though it’s a fairly simple calculation. Why not take stock now? The New Year is still full of promise.

Your net worth is what you’d have left after selling everything, paying the bills and settling all debts. Think of it as your liquidation value. The number is of keen interest to heirs trying to understand what will be theirs. But it’s useful for you as well. Calculated annually, your net worth provides the clearest picture of whether you are getting ahead. It helps gauge when you might retire and gives a roadmap to where you are losing or gaining value. That makes it easier to adjust and meet your goals.

Say, for example, your goal is to retire with $1 million. But during the worst two years of the recession your net worth—your total liquid value—went from $380,000 to $250,000. You’d understand right away that you need to adjust. Net worth hits home in a more visceral way than, say, looking only at a 401(k) statement that provides only part of the picture.

To figure your net worth you need two sheets of paper, one of them labeled assets and the other labeled liabilities. You want to add all assets and subtract all liabilities, reducing your life thus far to a single number. You can find online calculators to help. You can also see how you stack up against people your age and at your income level. For example, the median 55-year-old has a net worth of $180,125; the median net worth of households earning $75,000 a year is $301,475, according to Nielsen Claritas.

Start with assets, including retirement savings, checking and savings account balances, bonds or annuities, the total value of any stock holdings, your home and automobiles. To really fine-tune the figure include artwork, jewelry, furniture and other possessions that for most people do not move the needle a great deal. Put a value on each of these things and add them.

On the liabilities sheet, list all credit card balances, personal loans, student loans, auto loans and mortgages. Then add those and subtract it from the figure you got on the assets sheet. Voila. You now know what you are worth on paper. Watching this number from year to year shows how new debts and all spending subtract from your net worth, while general thrift, retired debts, and investments that rise pad your net worth.

The figure is not perfect. Figuring your net worth is especially difficult if you own a small business, which may be difficult to value. If you are young and in a great career your net worth might be negative—but that’s okay. Once those college loans are paid off and you get a few raises that can turn around quickly. Likewise, if your net worth takes a dip because the stock market or housing market fell, that’s not so terrible assuming you can hold on for the recovery. But it’s always good to know where you stand.