Personal Finance in Your 20s and 30s: How to Assess Changes in Your Net Worth - dummies

Personal Finance in Your 20s and 30s: How to Assess Changes in Your Net Worth

By Eric Tyson

If you don’t want to be bothered with the time-consuming task of tabulating your spending over the past year, here’s an alternative method for arriving at your savings rate that may be quicker for you. Follow these few easy steps, and fill in the blanks in the table.

  1. Calculate your net worth.
  2. Calculate your net worth from one year ago.You can determine your year-ago net worth by tallying your financial assets (savings and investments) from one year ago and subtracting your financial liabilities (loans and debts) from one year ago. Don’t count your home as an asset or your mortgage as a liability. Your concern here is financial assets.
  3. Correct for any changes in value of investments you owned the past year.

    Suppose that your net worth today is $15,000, whereas one year ago it was $10,000. You might conclude from the change in your net worth that you’ve saved $5,000 , but that figure may not be correct, and here’s why. A year ago when you had a net worth of $10,000, you presumably had savings and investments, and those would have changed in value over the past year. Suppose you made some good investments and they produced $1,000 in returns (from interest, dividends, appreciation, and so on) over the past 12 months. Though you’re happy to have made $1,000 on your investments, that money isn’t new savings and shouldn’t be counted in your savings-rate calculations. So you really saved $4,000 .Conversely, if your net worth was reduced over the past year by declines in the value of your investments, you should add back that figure when determining your savings rate. If your investments declined by $1,500 in value over the past year, you really saved $6,500 . The table walks you through this part of the analysis.
Calculate your net worth now and one year ago
Today One Year Ago
Savings & investments $___________________ Savings & investments $___________________
– Loans & debts $___________________ – Loans & debts $___________________
= Net worth today $___________________ = Net worth a year ago $___________________
Correct for changes in value of investments you owned the past year
Net worth today $________________
– Net worth a year ago $________________
– Appreciation of investments (over past year) $________________
+ Depreciation of investments (over past year) $________________
= Savings amount $_______________
Annual gross income $_______________
Savings rate (savings amount divided by your annual gross income) _______________%

If you have debt that you’ve been paying down over the past year, you can count the principal payment reduction on that debt as savings. For example, suppose a year ago you owed $5,000 on an auto loan. Now, a year later, you owe just $4,500. You can count that $500 reduction in what you owe as new savings.