Like an annual physical or a routine dental cleaning, there's a financial chore that's good for your health but not necessarily a lot of fun. Don't panic; I won't make you step on a scale or scrape at your molars with a metal pick.
But, once a year or so, it's useful to make a calculation of your net worth. If you're a computer maven and use financial software like Quicken or Money, the program may run the calculation for you. If not, it involves nothing more difficult than addition and subtraction. It's pretty easy, and there will not be a quiz.
A net worth calculation gives you a snapshot of your financial health. It's easy to get lost in the flurry of monthly bills and compartmentalize your money, especially if you're handling half-a-dozen or more accounts each month. Your net worth can be an overall indication of whether you're in good financial health.
Your net worth is determined by a simple equation -- your assets minus your liabilities. If we all had just two accounts to reflect those two variables, calculating net worth would be a snap. But, I imagine, you probably have a number of accounts for banking, retirement, and investments. You probably have a few outstanding loans. Wander over to your filing cabinet and pull out your most recent statements.
Your assets may include a home, vehicles, boat, jewelry, checking and savings accounts, retirement accounts, investment accounts, cash, savings bonds, and that antique furniture you inherited from Aunt Maude. Write down the value, or estimate a value, for each item on your asset list. Add them up.
This list should give you an idea of how much money you would have if you sold everything and tried to live off the proceeds. With that in mind, you may choose not to list items, like wedding jewelry, that would have to be pried out of your cold, dead hands before you agreed to part with them.
Before we even continue past this first step, your list of assets should give you an idea of how you've ordered your financial priorities. You may be putting money exactly where you think it's important. On the other hand, you might be surprised to compare the values of the Cadillac and Mercedes parked in the driveway with the value of your retirement accounts.
Now, let's move on to your liabilities. This list may include a mortgage, home equity loan, car loans, student loans, credit card balances, and that money you owe your brother and just never got around to paying back. If you list an asset, make sure to list its corresponding liability. In other words, don't count the value of your home without also counting the mortgage. Now, add up your liabilities.
For the final step, fill out the equation: assets - liabilities = net worth. Now that you have the answer, what does it tell you?
First, the disclaimers. There's no right answer. Your net worth will vary over your lifetime, and the important thing is whether it matches your lifestyle and goals. Two neighbors, living side by side, can have dramatically different net worths. Each may be appropriate to their separate lives. There's no need to drop everything, put aside your goals, and strive to achieve a million-dollar net worth.
Now look at your figure. If you're young and just beginning to work, a low or negative net worth may not indicate a problem, depending on your situation. It may make sense, if you have student loans and have just started saving money for retirement.
Is the figure negative? For most people, that's a problem. It probably means you've taken on a lot of debt, neglected savings, or both. Credit cards may be the culprit. Nothing can decimate a person's net worth like those plastic cards in your wallet. If you're carrying a balance, you're letting major credit card issuers like JPMorgan Chase (NYSE:JPM), American Express (NYSE:AXP), Capital One Financial (NYSE:COF), and Citigroup absorb your net worth.
Check out the Credit Center for resources to help you pay off that costly debt. Set a goal to increase your net worth to zero, then to a positive number.
If your net worth is not negative, do you see other red flags? For example, you may think you're saving a lot of money for retirement or for an emergency fund. But, if you're also carrying credit card balances or several vehicle loans, see what that does to the value of your assets. They may erase or even exceed money in the bank.
The most important feedback you can get from your net worth comes from tracking it over time, such as once a year. Generally, it tells you whether you're adding to your assets or your liabilities. In general (and unlike your waistline), you want that number to go up.
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Fool contributor Mary Dalrymple welcomes your feedback. She owns no shares of any of the companies mentioned in this article. The Fool's disclosure policy can be found here.
