Part of: How Does the Net Worth Planning Process Work?
Calculation of net worth can be done with a variety of tools. Though many tools exist, they all must involve the essential concept of subtracting liabilities from assets.
These tools include a simple worksheet, an online calculator, a spreadsheet based calculator or a personal finance computer program to name a few. More complicated calculators exist for individuals with more complex financial situations, i.e. business owners or those with extensive assets. For example, using a spreadsheet based worksheet allows you to customize your net worth calculator to fit your unique financial situation. Once established, future calculations will be much easier by using your template.
Though the principle is simple, it is very easy to fudge the numbers to paint a prettier, albeit false, picture. The purpose is to establish an accurate valuation of current net worth. It is necessary to establish the fair market value of all assets. Remember to remain conservative.
When net worth is determined, keep in mind that the result is for that specific date. In reality, net worth fluctuates daily. This is because the values of investments fluctuate, property values generally appreciate, automobiles usually depreciate, etc.
The process of calculating net worth is often tedious. It involves the collection of all financial records. Though painful, it is a necessity. On the bright side, many of the documents used in calculating net worth are also used in other areas of financial planning. Digging up and looking at these documents will also provide a perspective you may not otherwise be privy to. The more familiar you become with the process, the easier it will become. Your record keeping will improve and when the time comes you will be much more efficient at retrieving the required data.
Calculation of net worth should be done annually at a minimum and if possible around the same time each year. A single net worth calculation doesn’t tell much about the financial situation of the family. Over time, trends can be identified and a family can determine whether they are on target or not and whether adjustments should be made.
Note: If you desire to use a spreadsheet to calculate your net worth, many templates can be downloaded for free and modified to suit your individual needs. If you do not have a spreadsheet program like Microsoft Excel, there are free programs available like OpenOffice Calc. OpenOffice Calc is available as part of the OpenOffice software suite from www.openoffice.org.
