Happy 2014! Today marks the first day of the January Money Diet, an annual tradition for hundreds of us who take a month-long break from nonessential spending to start the new year financially strong. January 1 is a splendid day to figure out exactly where you are financially. In my humble opinion, the best and most honest way to measure this is by figuring out your net worth.
Our family’s finances didn’t really start moving in the right direction until I began doing this exercise each month. Before then, I could fool myself too easily. I could feel virtuous about putting $100 in our savings account, for instance, and conveniently overlook the fact that our credit card debt had increased by $200 that month.
Net worth, as I’m sure you know, is the difference between what we own and what we owe. On the first day of every month, I calculate ours. Now that it’s moving in the right direction, it’s an exercise I actually look forward to! My goal is to improve our net worth each and every month, even if it’s just a little bit.
If you do the same, I believe you’ll discover that your finances can improve dramatically over time. Just focus consistently on moving that bottom line up, up, up.
How To Figure Your Net Worth
Start by adding up your assets. If you’re a homeowner, list the current value of your home. If you’re not sure, a site like Zillow can give you a rough estimate for now. Your professional neighborhood realtor would probably be happy to give you an estimated market value, too.
Go out to your car and write down the mileage and condition, enter the info at Kelley Blue Book, and figure out the private party value. Check the current balances for your bank accounts, retirement funds, investments, etc., and add those to the list. Don’t forget things like your grandpa’s coin collection, or any valuable jewelry, antiques, artwork, etc. you own. Just be realistic about the cash that the sale of such items would generate, which is sometimes considerably less than the appraised value. Add everything up, and you’ll have a pretty good idea of your total Assets.
Next, make a list of every single one of your debts: mortgage balance, car loan, credit cards, lines of credit, student loans, etc. Add these up, and you’ll have your total debts, or Liabilities.
Now, simply subtract the Liabilities from the Assets to figure your Net Worth. You can create a simple spreadsheet with a program like Excel (Money Under 30 has one posted here) or you can simply figure it with piece of paper and a calculator.
The result will be different for each of us. If yours is a negative number, don’t despair! When I was 21, I had zero assets, $5000 in credit card debt, a new car I couldn’t afford and an upside-down car loan with a 21% interest rate! No matter what your financial situation is today, you can acknowledge that this is your starting place and resolve to get your net worth moving in a positive direction in the days ahead.
Gold vs. Butter
Someone once explained this concept to me by putting spending in two categories: gold and butter. Investing money in “gold,” or assets, increases our net worth. Spending money on “butter”—more stuff—decreases our net worth. By figuring our net worth every month, I can see the effect of my financial decisions in a very real and immediate way.
If I charge a $25 sweater (“butter”) on my Visa card, our net worth goes down $25. If I instead contribute $25 to my IRA (“gold”), our net worth goes up $25. So simple!
Your Homework Assignment: Figure out your net worth, and leave a comment below when you’ve finished the task. Resolve to do this calculation monthly during 2014, and challenge yourself to increase your net worth every month. Are you already in the habit of regularly tracking your net worth? You get to coast today, or you may wish to set a Net Worth Goal for the end of 2014.
Finally, my friends, no matter what the spreadsheet says – YOU are worth more than the finest gold or silver. Here’s to a successful January Money Diet, and a financially strong 2014.