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Determining Your Net Worth

People who are preparing to make a large purchase often think about their credit score, and for good reason. It is a measure with which lenders decide your credit-worthiness and risk. However, for some people, the whole process of credit (while important) and managing it can be overwhelming.

That is why I suggest taking a slightly different approach, not just as you think about buying, but with your entire life: Focus on your net worth.

There is a great FREE downloadable mini book from Seed Time you can get called "The Christian PF Guide to Getting Out of Debt". I suggest you download the 40-page booklet here: Seed Time

In that mini book, they talk about many great factors regarding how to look at debt, how to get it under control, and how to eliminate it. But one chapter talks specifically about net worth, and I want to share a portion of that with you for consideration to help you understand why its so important:

How to calculate your Net Worth
This shouldn't take more than a hour if you have never done it before.
When you update it in the future it will take even less time than that. I
have created a template from my own balance sheet that you can use if
you would like. (You can download it in the PDF book).
1. Get a spreadsheet
First off, you can do this on paper if you really want to, but I suggest
Excel, Google docs, Open Office, or really any kind of spreadsheet will
do.
2. Total your assets
List every asset you can think of. Anything that you could realistically
sell. For the purposes of sanity and simplicity I don't bother with items
under about $500. Yea, I am sure I could find someone on Ebay to buy my
socks, but I am just looking for a general picture. So I just lump together
all these smaller items as one line called "Misc items" and take a
conservative guess of what they could be sold for.
So your house, cars, retirement accounts, stocks, savings accounts,
checking accounts, emergency fund, jewelry, and anything else similar
would fall in this category.
To get real estate values you can use Zillow to get a decent estimate of
what your home may be worth. For automobiles you can check out Kelley
Blue Book to see what they could be sold for. For all your checking,
savings, investment accounts you can either check the balances online, or
just use your last statement.
Once you have them all listed with the estimated selling/liquidation
value you can total them up.
3. Total your liabilities
A few lines below the Assets total, we are going to now list every debt
you have. Mortgages, credit cards, student loans, they all apply. Do the
same as above checking balances on each one and then total your debts
to get your liability total.
4. Subtract them
Now you can subtract your liability total from your asset total and viola!
You have your Net Worth. Date it and save it.
Now what?
When I first calculated my Net Worth, it was -$13,843.84. Which was eyeopening to me. I knew I had a bunch of debt, but didn't realize how below par I was. Regardless of what you number is, just look at it as the starting point. It is from this point that it will become larger.
After we had been working at it for one year it was up to $746! We were
so excited to have a positive Net Worth! Even if it was only $746. As we
kept on working on it, it has just continued to grow.
I normally update mine about two times a year. But if you are working
really hard at it and need to see the encouragement of it increasing, do it
more! As in just about anything, you are either moving forward, or you
are going backwards. If you are increasing your assets by making good
buying decisions or minimizing debts your net worth will be growing.

Again, I suggest going to their site and getting the free downloadable book. But the reason this is so important, in my view, is that it gives you a better view of your personal financial picture and it helps you evaluate the importance of the things you are putting your money into.

As you consider investing in real estate or moving from renting to buying, seeing the value in what you are doing is so important. You can do things you WANT but don't NEED to do like buy that new iPhone, those boots, and eat out twice a week on the fly OR you can look at it in terms of how it impacts your net worth and, say, your ability to make a down payment!

When you look at things in terms of the impact to your net worth and pair that with keeping and sticking to a budget, as you get any debts under control I believe you will find, as many people do, that with some planning, discipline, and responsibility you can grow your net worth, and plan ahead in your budget for the things you WANT (Like I WANT my new iPhone!)

It's win-win!

DK





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