Best way to calculate Net Worth?

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Postby jer » Sun Apr 15, 2007 2:39 pm

I use Microsoft Money to track my finances, so it's easy to calculate net worth as long as I do all the accounting properly. It's all too easy to create fictions to hide things from yourself.

I don't own a house, so I'm free from that dilemma, but if you do, I think it's important to track both "net worth" and "net worth minus primary residence". Your house is an asset, after all, and the equity can be available to you to borrow against.

I charge depreciation on my car every month as an expense. (Your car payment is NOT an expense -- only the interest portion of it is. A huge mistake I see a lot of people make is treating the payment as a monthly expense.) Sometimes some hand-waving is involved in estimating depreciation, but that's okay -- a lot of things in accounting are half hand-waving. As long as the result is honest and useful, you're okay; the number doesn't have to be precise every month, but it has to be accurate over the long term, and to be useful, it should allocate expenses where they are incurred. If you drive 5,000 miles one month, you charge more depreciation to that month. It's also okay, for example, to distribute the initial off-the-lot depreciation of a new car over, say, the first year you own it, on the assumption that you know you won't be selling it for at least that long.

Tracking the loan balance (and splitting the payments for accounting purposes into interest and principle) gives you a bottom line on that, along with a true indication of your monthly expense -- depreciation plus interest.

Once you have everything set up and you're doing proper accounting of everything (not hiding things from yourself, like pretending that your monthly credit card payments are an expense rather than the actual purchases made) it all falls into place.

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