How To Calculate Your Net Worth (and why it's an important financial freedom step)

Baby Step to Financial Freedom # 9

Just imagine having enough money socked away earning passive income- enough to pay all your bills and still have fun –that you can afford to say “asta la vista” to the shackles of your 9 to 5 job. You wake each day able to do whatever your heart desires.

At age 30, I decided I wanted this kind of freedom. And I didn't want to wait too long for it-- I wanted financial freedom while I was still young and healthy enough to enjoy it. To get there, I needed a plan. First, I needed to know where I was starting and then, where I planned to finish. Your current net worth serves as the starting line to your financial freedom journey. Knowing exactly where you are today is the first step to moving to where you want to be.

Instructions:
It may sound like a difficult chore, but all you're really doing is totaling up what you own and subtracting what you owe. If you sold all your assets and paid all your debts, what would be left over? That's your net worth.

1. List the current market value of the things you own (assets): cash, bonds, stocks, mutual funds, retirement accounts, whole-life insurance cash value, annuities, pension and profit-sharing plans, real estate, business assets, vehicles, household furnishings, jewelry, collectibles.
2. List the current balances of what you owe (liabilities): mortgages, loans, medical bills, back taxes, credit cards.
3. Subtract the total of what you owe from the total of what you own. This is your net worth.
4. Save your calculations, update once every quarter and track your progress. You might find it helpful to make a wall chart and hang it near your treasure map to a rich life. It can feel draining to make loan payments and feel as if you're getting nowhere. By updating your net worth regularly, you'll be encouraged as you watch your number rise.

It's possible that your current net worth is a negative number, especially if you're young, recently took out a mortgage on a house, or you've been living beyond your means on credit. But don't despair, because you've just taken a step towards upward progress. You can learn ways to beef up your assets and trim down your liabilities.

In a future Baby Step, I'll show you how to figure out your target net worth. Then we'll plot your course between today's net worth and tomorrow's financial freedom!

Exercises for Extra Credit:

If you want to feel accountable -- or competition spurs you on -- set up a free NetWorthIQ account to track and compare your progress with others. You can view my account here.

This calculator estimates how your net worth could change over the next ten years.

See where you rank based on your age and income.

See where you stand according to the book titled The Millionaire Next Door by Thomas J. Stanley and William D. Danko.

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Did you miss a step? Want to learn my recipe for success, happiness and a million dollars? Start here: Baby Steps to Financial Freedom.