On the first of every month, I calculate my net worth. It gives me an idea of how well I did financially for a given month, because I can compare this month's net worth to last month's. I can also use it to compare it to the national average for my age. Coming from the Unites States Census Bureau and adjusted for inflation, the average net worth for a particular age is...
Step 1: Update your finances
The first thing I do before starting my calculation is getting my finances up to date. I manually update my budget, pay off any outstanding credit cards, and allocate money for the next month (if it falls on the right day of the week). You don't have to do this step to calculate your finances, but I recommend you do.
Step 2: Add up all your assets
You want to next add up all your assets. Examples of assets are...
Checking and Savings accounts: I simply open my online banking account and add the numbers I see. For me, I only use one bank so all my checking and savings accounts are on the same page. For you, they might be through different banks. Regardless, don't do anything fancy. Don't try to add pending money. Just simply grab the number you see after you login.
Investment accounts: Just like the checking and savings account, simply open your investment account(s) and add the first number you see. If you're doing it during the day and the number might be changing, just use the first number you see when you login.
Vehicles: I use Kelley Blue Book to get the value of my vehicles. I bookmark the page for each of my vehicles. It doesn't matter what estimate you use, as long as you're consistent from month to month. I use the median trade-in value, which is a low estimate. But, I would rather estimate low and end up with a higher net worth, rather than the opposite.
Home: I think Redfin gives the best estimate for a home. I have found that it is the closest to what a real appraisal ends up being. Just search your address and you can see your Redfin Estimate at the top of the page.
Step 3: Add your debt
Add together all your outstanding debt, i.e. the money you still owe. For most debts, you can look on the website to see how much money you still owe. If for some reason you're not sure how to find this number, you can always calculate it too by using a monthly amortization calculator. To use a monthly amortization calculator, you'll need to know your original loan terms. Also, add in any credit card debt you haven't paid off yet.
While this isn't exactly debt, I would also add tithe money or money you've set aside to donate. This money might be technically be part of your net worth, but I always add it with my debt. I don't want it to be added into my net worth, since I know I'm going to be giving it away. In a lot of cases, I should have already given it away and have forgotten to.
Step 4: Subtract your debt from assets... assets - debt = net worth
Now you're ready to calculate your net worth. Simply subtract your debt from your assets, i.e. assets - debt = net worth. In other words, subtract the number you got from step 3 from the number you got from step 2, i.e. step 2 - step 3 = net worth.
This number could be anything. It's very possible it could be negative too and for a lot of people it will be. This simply means you owe more money than what you're worth and you should prioritize your debt strategy.
Step 5: Analyze and repeat
Now you have your net worth! Record your net worth. I keep mine in a spreadsheet. I'll send you the one I use. Just message me and I'll email it to you! So now that you have your net worth, analyze it. Are you happy with it? Is it negative? What is it compared to last month (if you have last month's)? What do you want it to be at next month? How about at the end of the year? Why did my net worth go down this month? Or go up this month?
These are all questions I ask after calculating my net worth. For example, my net worth went down by about 28% in December. Very alarming at first, but then I realized I had just paid all the fees associated with buying a home and bought Christmas gifts for my family. The next month, I was able to calculate my net worth with the home and got a paycheck from some freelance work I did during the fall, which I usually use for Christmas. It went up 17%. The next month, it increased 16% and I was back to normal.
Lastly, make sure you calculate your net worth on the first of every month. If you miss the first, just do it as close as possible. There's been times I've calculated it on the 4th. It doesn't give perfect numbers, but it's still a good estimate for the month. I set a reminder in my phone to calculate my net worth on the first of every month.
A note to married couples
Always calculate your net worth as a couple. Don't calculate two separate values, i.e. a net worth for you and a net worth for your spouse. You're one and your finances should be too. If you have your finances completely separate, I recommend joint bank accounts and to start treating your finances as one.
Thanks again for reading Better Budget. I hope this helped you learn about the value of knowing your net worth and taught you how to calculate it easily. If I could have explained it any better, please let me know! As always, I hope this has helped your personal finance journey improve and ask me any questions you may have.
I'm in the process of getting my mortgage refinanced from a 30 year into a 15 year. I'm doing this because I'm trying to pay off my mortgage in 10 years. I set this goal because an average millionaire pays off his or her mortgage off in 10.2 years. I want to be better than the average millionaire and pay it off in 10 years flat (or sooner). There's a lot steps to reaching this goal, but refinancing is the first. I'm actually not sure what the next steps will be yet, but I'm okay with that. I'll figure out the next steps after I'm done this one. I know at some point I'll need to increase my income, but you get a lot more done if you focus on one step at a time.
Another reason I want to pay it off as early as I can is to gain more financial freedom. An enormous part of my monthly income goes straight toward my mortgage. After the refinancing is done, about 55% of my monthly income will go toward my mortgage. I'm not happy about this. I'd rather it be closer to 25%, but the home is expensive and I made some mistakes as a first time home buyer. Regardless, switching to a 15 year will help fix some of those mistakes. I'll end up paying my home off sooner too. Once my home is paid off, I will gain an enormous amount of financial freedom.
The way I look at the mortgage payment is in two parts: the investing part and the rent. Any principle is investing. The interest, taxes, and insurance are the rent. Looking at it this way helped me make the decision to switch to a 15 (and I would have switch to a 10 if I could afford it). On a 30 year, my mortgage payment is about $3170. Breaking that down, about $2651 is the rent (taxes, interest, and insurance) and $519 is how much I'm investing every month. I could get a lot nicer apartment for $2651 per month than what my house is (not as large, but nicer for sure).
On a 15 year mortgage, my payment would be about $3825 per month. However, my rent would decrease to $1995 per month, almost $700 less than what it is on a 30 year! Also, I'm now investing $1830 per month, about $1200 more!! This difference is huge and one of the biggest reasons I refinanced into a 15 year.
Please do these two things!
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My name is Corey and I have a passion for budgets and personal financing. I can talk about it for days (weirdly enough). Hope you enjoy the blog!
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