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Why & How I Calculate My Net Worth

December 29th, 2010 at 04:18 pm

Yesterday I did a post about calculating our year-end net worth, and decided to do a followup about why & how I do net worth statements.

As CB in the City said in his/her comment, a net worth statement is a great way to get a big picture look at how you are doing financially. Since I am prone to getting bogged down in details, it's essential for me to take a step back now & then to take a broad view of our finances.

Doing our net worth statement naturally leads to discussions between DH & I about whether or not we want to keep a particular account, re-allocate our investments, etc.

Another reason I like to do a net worth statement that I have never heard financial pundits mention is that for us it is part of our estate plan. When we created our estate documents, I sent a "Letter of Instructions" to my sister/executor that listed all of our major assets. But I made it clear to her that our accounts were always changing (everyone opens & closes accounts, but because DH & I are interest rate chasers, I think we do it more than average people) and told her that if DH & were to die in a simultaneous catastrophe (car accident for example), she should use our net worth statement as a map to locate all of our accounts. I wrote down very specific instructions about where to find the statement, and I always keep it in the same spot.

I used to calculate our net worth monthly, but came to realize that quarterly was plenty. Most useful for us is comparing where we are now to where we were one year ago. We have a spike in income that occurs approximately the same time each year (DH's business has a big seasonal peak), and our biggest expenses occur at the same time each year (paying our quarterly estimated taxes, and paying our annual property tax bill in one shot since we don't have a mortgage). So, comparing to a year ago gives us the most clear-eyed picture of how we are really doing.

As far as what to include in your net worth statement, there are legitimate differences of opinion. My terminology may not be "proper," but I do a 2-part net worth statement. Part 1 is what I call "financial assets": Cash, refundable deposits, bank accounts (including business account), investment accounts (including Treasury Direct), HSA, and tax-deferred retirement accounts. Part 2 is what I call "non-financial assets": For us, this is just our house & vehicles. Other things that some people might include here are: investment properties, art, antiques, collectibles, jewelry. I've decided not to include any of these because what we have is of minimal value and frankly I don't want the hassle of assigning values.

Deciding how to value the "non-financial assets" is a challenge to say the least. Everyone will have to decide for themselves how to do this. I check the KBB Private Party Value of our vehicles occasionally. For our house, I wanted to get as realistic as possible a picture of what we would NET if we were to sell our house, so I started with the purchase price MINUS 8% (to allow for the costs of selling a house, number one cost being real estate commissions) and then I adjust by the CPI-U (because I believe we bought at a non-bubble price and I think it's reasonable to think that over the long run real estate will keep pace with inflation). Remember that we paid cash, so we have 100% equity in our home. If home values in our area were to spike upwards, I would NOT adjust our home value upwards, but if they were to take a big drop, then I would check comparable sales prices and reduce the value of our home accordingly. As I said, my goal in assigning a value to our home is to be realistic, not overly-optimistic. It's not necessarily the "right" way but it's what we are comfortable doing.

When I do my year to year comparison, I'm looking at the TOTAL (Part 1 + Part 2). My DH tends to ignore Part 2 and just look at Part 1 (the financial assets).

3 Responses to “Why & How I Calculate My Net Worth”

  1. MonkeyMama Says:

    I use a similar methodology for our house (& don't see many people that do - maybe just you).

    By law, our tax assessment can not increase more than 2% per year (from base price), so using the assessed value yields similar results. Just, very simply. I will record modest gains (2% per year), and of course will record any losses, but the wild fluctations in years 2001 - 2008 or so weren't terribly useful for net worth tracking. Somewhere in there I just switched to assessed value. I suppose if not for our tax situation (2% rule) indexing to inflation is the nest best thing.

  2. MonkeyMama Says:

    Correction: indexing to inflation probably makes even more sense. That is what I meant to say. I'll have to keep that in mind for the long run.

  3. scfr Says:

    Using your tax assessed value sounds very logical given the 2% rule.

    Nice to know that a CPA uses a similar approach. Smile

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