Net worth determines those rankings of the country's wealthiest people, but it's also a good financial planning tool for the rest of us. Net worth is like a scorecard, says Art Dinkin, a certified financial planner. "It's a good way to keep track of where you are financially." The figure is easy to calculate, Dinkin says. "You take everything you own and subtract everything you owe."
Assets include the market value of your home, stocks, bonds and the cash value of life insurance policies. Liabilities include your mortgage, property taxes, car loans, credit card balances and any outstanding bills.
Change Is What Matters
Current net worth alone is not that meaningful. But when you track it from year to year and note the changes, then it becomes a useful measure of your financial health. A drop in net worth is a cause for concern. "If your net worth isn't growing from year to year, it may indicate you're spending too much," Dinkin says.If your net worth has declined, you're not alone. In September 2010, the Federal Reserve released data showing that total household net worth in the U.S. fell nearly 3 percent to $53.5 trillion in the second quarter of 2010. That's an average net worth of $182,000, though the super-rich skew the figure upward. Median household net worth—considered a more meaningful figure than the average—was $120,300 in 2007, the last time the Federal Reserve calculated the figure.
It's a good idea to calculate your net worth once a year. Once you have a previous figure to compare with, note how much your net worth changed and why. Did some assets appreciate? Were you able to save more? Did you take on more debt? The answers will help fine-tune your financial planning.
Get More Personal Finance Calculators at Diversified Insurance or Speak With A License Financial Advisor At 714-988-3325.
