In corporate accounting, the accountant's equation looks like this:
Assets = Liabilities + Capital (or Stockholder's Equity)
In personal finance, the equation is written a little differently:
Assets - Liabilities = Net Worth
The easiest method for calculating net worth is to start with your assets:
- List your largest assets; for most individuals this includes real estate and vehicles
- Next, list your "liquid" assets--checking and savings accounts, CDs, IRAs, 401(k)s, stocks, bonds, and cash on hand
- Next, (and this is the most time-consuming part) you will want to take an inventory of your other assets: household goods, clothing, jewelry, tools, collections, etc. While you are cataloging these assets, I highly recommend taking photographs of valuables and keeping a list of serial numbers, model and part numbers and other identifying information. If tragedy strikes, it will be far easier to file a claim with your insurance company with a complete catalog of your belongings.
Add items 1-3 to get your total assets. If you like a more detailed schedule of assets, item 2 represents your Current Assets and items 1 + 3 equal your Fixed Assets.
Next, we will move on to your liabilities:
- List all your major debts. This includes mortgages, car loans, student loans or other large debts with a repayment schedule. These are considered long-term debt.
- List all your revolving debts including credit cards and personal loans. These items, plus the current period payments from your long-term debt are your current liabilities.
Add your liabilities from items 1 and 2 above to get your total liabilities. Next, subtract your total liabilities from your total assets to find your net worth. If you have more assets than liabilities, you will have a positive net worth. If however, your debts are more than your assets, your net worth will be negative. In rare cases, you may end up with a net worth of zero should your assets equal your liabilities.
Obviously, a negative net worth is not ideal, but don't panic; it is a situation that can be reversed.
Before we move on to historical earnings, I want to point out that it's tempting to forgo the complete, detailed inventory of one's stuff. It can be very tedious and time consuming. There are a number of reasons I encourage people to do the inventory anyway; for one, as I mentioned earlier, it provides a detailed accounting of valuables for use in insurance claims and/or police reports should tragedy strike.
Secondly, it gives one a clear picture of the amount of stuff they own and how much it is worth monetarily. This second reason can be used in several ways: it makes de-cluttering one's home much easier as it gives the individual more information to decide how to handle their belongings. Items that are no longer used can either be sold, donated or tossed depending upon their monetary value.
Also, another benefit is that once you have calculated your historical earnings, an inventory of your assets will give you a clear idea of what you have to show for all your hard work over the years. You may find that you have made poor choices as to how you have used your money (or life energy). Conversely, you may find that you have wisely used your money on purchases and have useful or valuable assets. Either way, you won't know for certain until you have completed a detailed inventory of your assets.
Unless you have kept meticulous records of your income over the years- everything from allowances, babysitting money, after school jobs or paper routes to a full-time career as an adult, calculating your historical earnings will be based on estimates.
Some other sources of historical earnings information include:
- Social Security statements
- Tax returns
- W-2 forms
- Check registers
- Savings account passbooks
When you add up all the money that has come into your life, you will get a clear overview not only of how much prosperity you have created for yourself, but also your natural habits around money. When your historical earnings are viewed in conjunction with your asset inventory, you can see how you have either squandered or saved over the years.