Three Important Ways to Calculate Net Worth
Written by DR
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Recently there have been a number of posts in various finance Blogs discussing some important questions about what should and should not be included in calculating net worth. Do you include in the calculation absolutely everything you own down to the last piece of flatware? Do you include your house, and if so, at the purchase price or current value? Do you include only your investments? The answers to these questions depend in part on what purpose the net worth calculation serves. We calculate our “net worth” in three different ways, each serving different purposes:
Personal Financial Statement (include everything): We maintain a Personal Financial Statement that includes everything we own and everything we owe. We update our PFS once a year or more frequently if necessary. The PFS serves several purposes:
- It shows in hard, cold numbers the net result of a lifetime of financial choices (both good and not so good).
- A PFS is required to obtain financing for the rental properties we buy.
- It’s a good reminder that much of what we own (e.g., cars) depreciates each year, and therefore, doesn’t move us closer to Financial Independence.
- It causes us to take stock of what we have, which often results in selling or donating stuff we no longer need.
