Net Worth Calculation Strategies
May. 17th, 2007 06:05 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
livingdebWhen people want to measure their financial health, or better yet, see their financial progress over time, one technique is to calculate your net worth (total asset value - total liabilities). You can use ratios involving this and such things as your age and income to get an idea of how you're doing compared to other people (with different ages and incomes), and you can use multiple calculations to see how your situation is changing over time.
There is some debate on what counts as an asset, or rather, which assets are worth including in your calculation. For example, most people think you should count your equity in the house you're living in, but some people think that since you have to live somewhere, that shouldn't count. Or they think that this money isn't as useful as other money because it's not very liquid. Some people leave out small things like how much each book is worth because it's not worth the trouble. Some people overestimate the value of their assets as if they are all priceless antiquities; others think garage sale prices are the way to go.
I just discovered my new favorite way to calculate net worth in golbguru's What Is The Worth Of *Net Worth* If It Is Not Usable? This author proposes a "liquid net worth." Values are based on how much you could get from your assets if you had to liquidate them right now. Here are some examples from my own situation:
* House - Typically you subtract what you owe from what the house is worth. Golbguru proposes that you also subtract closing costs. Also that if you're living in the house, you subtract the cost of a replacement residence, because you will still have to live somewhere. You could also subtract interest, taxes, and insurance you will have to pay during the typical amount of time it takes to find a buyer and sell the house. You could also subtract the amount you would spend to fix up the place for a buyer. If you can't pay off the mortgage early without paying a fee, subtract the fee.
* Car - Similarly, equity minus cost of replacement car! This one doesn't work for me, because I wouldn't replace my car with a cheaper one in an emergency. I'm basically already driving the cheap emergency car. Perhaps at the very least I could subtract the cost of bicycling supplies. Actually, I don't want to live in a house that costs less than my current house either, unless it's in a different part of the country.
* Retirement accounts - Typically you look up what they're worth today. Golbguru proposes that you subtract taxes and penalties for early withdrawal. (Until you're of age--then you can stop subtracting that.)
* Stocks - You could subtract trading costs from the current value.
* CDs - Subtract the penalty for early withdrawal.
* Vacation time - Currently I multiply the number of vacation hours I have (or the maximum rollover, whichever is lower) by my current hourly salary because they have to pay you this when you quit or retire. But it will certainly cost me big in potential retirement money to quit or retire now. I'm not sure how I would calculate that. I guess I wouldn't, because potential is not part of net worth.
If I don't worry about home or car replacement costs (assuming that I would factor that in at the time of liquidation when deciding whether to liquidate), then my liquid net worth is about 85% as big as my more traditionally calculated net worth.
There is some debate on what counts as an asset, or rather, which assets are worth including in your calculation. For example, most people think you should count your equity in the house you're living in, but some people think that since you have to live somewhere, that shouldn't count. Or they think that this money isn't as useful as other money because it's not very liquid. Some people leave out small things like how much each book is worth because it's not worth the trouble. Some people overestimate the value of their assets as if they are all priceless antiquities; others think garage sale prices are the way to go.
I just discovered my new favorite way to calculate net worth in golbguru's What Is The Worth Of *Net Worth* If It Is Not Usable? This author proposes a "liquid net worth." Values are based on how much you could get from your assets if you had to liquidate them right now. Here are some examples from my own situation:
* House - Typically you subtract what you owe from what the house is worth. Golbguru proposes that you also subtract closing costs. Also that if you're living in the house, you subtract the cost of a replacement residence, because you will still have to live somewhere. You could also subtract interest, taxes, and insurance you will have to pay during the typical amount of time it takes to find a buyer and sell the house. You could also subtract the amount you would spend to fix up the place for a buyer. If you can't pay off the mortgage early without paying a fee, subtract the fee.
* Car - Similarly, equity minus cost of replacement car! This one doesn't work for me, because I wouldn't replace my car with a cheaper one in an emergency. I'm basically already driving the cheap emergency car. Perhaps at the very least I could subtract the cost of bicycling supplies. Actually, I don't want to live in a house that costs less than my current house either, unless it's in a different part of the country.
* Retirement accounts - Typically you look up what they're worth today. Golbguru proposes that you subtract taxes and penalties for early withdrawal. (Until you're of age--then you can stop subtracting that.)
* Stocks - You could subtract trading costs from the current value.
* CDs - Subtract the penalty for early withdrawal.
* Vacation time - Currently I multiply the number of vacation hours I have (or the maximum rollover, whichever is lower) by my current hourly salary because they have to pay you this when you quit or retire. But it will certainly cost me big in potential retirement money to quit or retire now. I'm not sure how I would calculate that. I guess I wouldn't, because potential is not part of net worth.
If I don't worry about home or car replacement costs (assuming that I would factor that in at the time of liquidation when deciding whether to liquidate), then my liquid net worth is about 85% as big as my more traditionally calculated net worth.
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Nice!
on 2007-05-18 02:17 am (UTC)net worth
on 2007-05-24 04:33 pm (UTC)Re: net worth
on 2007-05-25 03:59 am (UTC)(The differences between those numbers are so small I should probably just use the easiest-to-find figure.)
Well, it's a good point that the best way to calculate net worth depends on how you want to use it. As a progress indicator, your way is best. (And I also like to project future net worths given current trends--again, different things can be expected to change value at different rates.)
Golbguru's purpose was explained like this: "[S]uppose you lose your job (or fall into some other financial trouble) - how much of that ... net worth will come to your rescue?" What if you had to sell everything now and use the proceeds to escape? That's a very different purpose.
I think my main purpose is the usual, but sometimes I do think about running away. Some people have bag lady fears--my wacky fears are more like holocaust fears or mafia fears or stalker fears, something like that.