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Net Worth Calculations Can Be Tricky

Trying to determine your net worth is a valuable exercise, though it’s not always straight forward. There are several forces working against you and some obstacles that you’ll need to overcome.


Try as I might, reimbursed work purchases and travel expenses never fall in the same calendar month as the deposit (of the reimbursement check) to cancel each other out. That means that sometimes an average of a couple of months is necessary in order to get a (slightly) more accurate picture of month-end net worth. This still causes problems for me, so if you have a good way of handling it, please let me know. The trouble is that the transactions are not easily moved from one month to another (I use MS Money 2004) in order for them to line up properly, and there are enough transactions that a more simplistic approach doesn’t suffice either.

Irregular expenses.

We all have some expenses that are not paid on a monthly basis. My parents had what they called “Monthly Installment of Yearly Expenses” (MIYE). They would determine the total annual expense for an irregular payment, then divide it out into the twelve months of the year. Their goal wasn’t so much to facilitate net worth calculations as it was to prevent extra lean months from poor budgeting, but it can also have that effect.

    • Car insurance
    • Property tax
    • Christmas gifts
    • Some medical bills
    • Car registration

The author of www.mymoneyblog.com also uses it (or suggests that it be used) for renter’s/homeowner’s insurance, water/sewer, phone (if not paid monthly), and tuition. Tuition is an interesting one because I had always tried to earn enough during the summer months to cover my college expenses. If a student has a steady job that they keep during the summer and the school year, it would be wise to calculate in all the expenses since sometimes leasing an apartment means lump sum (rather than regular, monthly) payments.

The more difficult irregular expenses to deal with are the emergencies like car repairs and large deductibles. These will cause downward spikes that you have no control over.

Irregular income.

If you do consulting on the side or receive cash gifts, your net worth will take a jump during that particular month. That’s not a bad thing, but it does make it tougher to trend the growth of your net worth. The longer period for which you have accurate data, the better the chances that your trend line will more accurately reflect reality.

Cash gifts can mask how your behavior affected your net worth for good or ill. You may want to include a line on your net worth calculations for one-time gifts or expenses. A place for notes may also be helpful because you’re likely to forget what happened (at least I am).

What to include.

There is a perpetual debate about what constitutes net worth and consequently what the formula looks like. It’s generally accepted that Net Worth = Assets – Liabilities, but that’s where the agreement ends.

Robert Kiyosaki (author of the Rich Dad series) believes that an asset is something that makes you money and everything else is a liability. Therefore, your house is a liability, not an asset. If you follow his line of thinking, you’ll come out with a number that’s different from most everyone else. That’s not bad, provided that you keep the formula consistent because it’s the month-over-month change that’s really valuable.

Some people will include their cars in the calculation, but I personally don’t believe that they belong there. They depreciate rapidly and cost you money each month. Plus you need them, so they’re not exactly money waiting to be put to use like a bank account balance.

Some people are really anxious to maximize their net worth and they’ll quantify the value of every last thing they own. That is tiring and also somewhat inaccurate because of the same reason that a car isn’t easily convertible to cash. Generally you have those items because you need/want them. If not, sell them on eBay or Craigs List because they’re just taking up space (and they’re probably not appreciating in value).

Pay down the mortgage, make a dollar.

For a little while I was incorrectly calculating our net worth. You’ll see the problem in the example below. The gist of it is that moving a dollar from savings to equity results in a net worth increase equal to the amount moved.
Assets – Liabilities = Net Worth

Before paying off the mortgage with savings:
$1 (savings) + $0 (equity) – $1 (mortgage) = 0 (net worth)

$0 (savings) + $1 (equity) – $0 (mortgage) = 1 (net worth)

When trying to establish a prediction (trend line) for our future net worth based on our current rate of accumulation, the angle of the trend line was too steep because of this quirk. Our net worth wouldn’t continue to increase at the same rate after paying off our mortgage, so there was clearly a problem.

Here’s the correct way to do it. The basic equation is the same, but the error was using equity instead of home value.

Assets – Liabilities = Net Worth

Before paying off the mortgage with savings:
$1 (savings) + $1 (home value or selling price) – $1 (mortgage) = 1 (net worth)

$0 (savings) + $1 (equity) – $0 (mortgage) = 1 (net worth)

Tools make it easier.

Many people are still looking for tools to ease the trouble of calculating personal net worth, but there are quite a few options. I personally use MS Money 2004 (my exact method is described in a post that will be up soon), but Quicken is another similar package. Generally these applications are able to connect to your banks via the internet and pull down transaction histories which makes it easy to see everything in one place. I’m personally a fan of all that sensitive data being kept on my hard drive (and being backed up to an external hard drive).

Some are not so concerned with privacy and flock to online tools such as the one offered by www.Yodlee.com which will also keep track of all your passwords, evidently. I’m concerned with the prudence of trusting all my private information (passwords and financial info) to a single site. With all the breaches of security at supposedly trust-worthy companies, I try very hard to minimize the number of companies who have my personal info, especially my social security number.


Determine how you’ll calculate your net worth, and hop to it. Figure out how to address the above issues and any others that might come up along the way, because it’s worth it.

Robert Kiyosaki sometimes refers to the financial statement as a grown-up report card, and in a sense he’s right. How well a person manages his/her money does say something quite profound about a person’s abilities, self discipline, and focus. I’m tracking my net worth in order to better my family’s financial situation, and expect that it could have the same effect for you.

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