How to Start Investing: Calculate and Analyze Your Net Worth - dummies

How to Start Investing: Calculate and Analyze Your Net Worth

By Paul Mladjenovic

Your net worth is an indication of your total wealth. You can calculate your net worth with this basic equation: total assets, including investments, less total liabilities equal net worth (net assets or net equity).

For many investors, just being in a position where assets exceed liabilities (a positive net worth) is great news. Your mission in analyzing your net worth is to ensure that your net worth increases from year to year as you progress toward your financial goals.

Totals Amounts ($) Increase from Year Before
Total assets $290,590 +5%
Total liabilities ($117,000) –2%
Net worth (total assets less total liabilities) $173,590 +3%

After you create a balance sheet to illustrate your current finances, take a close look at it and try to identify any changes you can make to increase your wealth. Sometimes, reaching your financial goals can be as simple as refocusing the items on your balance sheet. Here are some brief points to consider:

  • Is the money in your emergency (or rainy day) fund sitting in an ultrasafe account and earning the highest interest available? Bank money market accounts or money market funds are recommended.

    The safest type of account is a U.S. Treasury money market fund. Banks are backed by the Federal Deposit Insurance Corporation (FDIC), while U.S. treasury securities are backed by the “full faith and credit” of the federal government. Shop around for the best rates.

  • Can you replace depreciating assets with appreciating assets? Say that you have two stereo systems. Why not sell one and invest the proceeds? You may say, “But I bought that unit two years ago for $500, and if I sell it now, I’ll get only $300.”

    You need to decide what helps your financial situation more — a $500 item that keeps shrinking in value (a depreciating asset) or $300 that can grow in value when invested (an appreciating asset).

  • Can you replace low-yield investments with high-yield investments? Maybe you have $5,000 in a bank certificate of deposit (CD) earning 3 percent. You can certainly shop around for a better rate at another bank, but you can also seek alternatives that can offer a higher yield, such as U.S. savings bonds or short-term bond funds.

    Keep in mind that if you already have a CD and you withdraw the funds before it matures, you may face a penalty (such as losing some interest).

  • Can you pay off any high-interest debt with funds from low-interest assets? If, for example, you have $5,000 earning 2 percent in a taxable bank account, and you have $2,500 on a credit card charging 18 percent (which is not tax-deductible), you may as well pay off the credit card balance and save on the interest.

  • If you’re carrying debt, are you using that money for an investment return that’s greater than the interest you’re paying? Carrying a loan with an interest rate of 8 percent is acceptable if that borrowed money is yielding more than 8 percent elsewhere.

  • Can you sell any personal stuff for cash? You can replace unproductive assets with cash from garage sales and auction websites.

  • Can you use your home equity to pay off consumer debt? Borrowing against your home has more favorable interest rates, and this interest is still tax-deductible.

    Paying off consumer debt by using funds borrowed against your home is a great way to wipe the slate clean. What a relief to get rid of your credit card balances! Just don’t turn around and run up the consumer debt again. You can get overburdened and experience financial ruin (not to mention homelessness).

The important point to remember is that you can take control of your finances with discipline.