The Complete Guide To Calculating Your Net Worth: Making Accurate Estimates
One of the challenging tasks involved in calculating your net worth is assigning a value to all of your assets. It's important to make conservative estimates when placing value on certain assets to avoid inflating your net worth (i.e. having an unrealistic view of your wealth). While some assets are easy to value (such as cash), others, such as your home and antique collection, are a bit more tricky.
The Kelley Blue Book of the NADA Official Used Car Guide can help you determine the current value of your car(s). You can find these guides at a book store or the public library, or you can use their online calculators to determine your car's value. You will need to know the car's make, model, year, mileage and any options (such as a navigation system). The book values change frequently, so you will probably need to update this value each time you calculate your net worth to provide an accurate figure.
Just like your house, don't assume that because you paid $100,000 for an antique that you will be able to sell it for that price in today's market. You should use the estimated market value for antiques, coin collections, jewelry, musical instruments, stamps and other collectibles. A number of price guide books are available to help you determine the market value of a particular collectible; or you can take your item to an appraiser. A professional appraiser can determine accurate market values which can be used to help you protect your collectibles with adequate insurance coverage.
Particularly in these years following the housing crisis, you cannot assume the value of your home is the same as the price you paid. In many cases, home values have fallen significantly since 2007; some markets have dropped 50% or more in price. While this is extremely devastating, it is important to use the actual current value of your home rather than using a) what it used to be worth; or b) what you wish it were worth. As the market recovers, values in many markets are likely to increase. Since your home is probably your largest asset, this figure will play an important role in calculating an accurate net worth figure. You can determine your home's current value by researching what similar homes in the area have sold for recently, or by asking a real estate agent to provide an estimate (he or she will likely use the sales comparison approach by comparing recently sold, similar properties in the area). If you want to get really accurate, deduct 5% from the home's value to represent the real estate commission you would have to pay when the home is sold.
It would take a lot of time to write down everything in your home and determine an accurate value for each item. If you decide to do this, add everything up and then cut it by half to come up with a conservative estimate.
Life Insurance and Annuities
You can include the cash surrender value of your life insurance policy as an asset in your net worth calculation. This is the sum of money your insurance company will pay you if you voluntarily terminate your policy before its maturity (or before the insured event occurs). The cash surrender value applies to the savings element of whole life insurance policies that are payable prior to death. To determine your policy's cash surrender value, contact your insurance agent or review your policy for information. You can also include the cash surrender value of any annuities as well. Be aware that certain fees, penalties and taxes may apply; consult a tax professional before surrendering your life insurance policy or annuity.
Pensions and Profit-Sharing Plans
The current value of your pension and profit-sharing plans are considered assets on your net worth statement. It can be challenging to put a present-day dollar value on future income; however, for the purposes of your net worth statement, include the amount that you could withdraw from the plan(s) if you quit your job today. Your firm's personnel department can provide you with the figure. You can simply list the current balances of other retirement savings plans, such as IRAs and 401(k)s.
Figuring out your liabilities is usually pretty straight forward since you probably receive monthly statements for any outstanding debt. These statements are based on actual numbers – not estimates – and show exactly what you owe. Some statements, such as for credit cards, do provide an estimate of how much it will cost to pay off the debt over time, including such fees as interest charges. For example, if you owe $2,000 on a credit card and pay only the minimum month payment you could end up paying back $2,500 if you pay it back over 3 years, or more than $4,000 if you take 15 years.
It would be nice to include your future inheritance to boost your net worth; however, don't do it. The inheritance you are expecting is just that – an expectation and not a certainty. It cannot be counted as an asset until you are in possession of the related assets (cash, real estate, etc). There are several reasons why you shouldn't plan on receiving an inheritance:
- Your parents and grandparents were hit by the financial crisis just like you were
- People are living longer and spending more of their savings
- An increasing number of adults are providing financial support to their grown children
Longer life spans and financial support of adult children equate to spending more money during retirement. These factors combined with hard-hit stock portfolios (and other investments) have led to a smaller net worth for many who previously believed they were well set up for retirement and leaving money to their children.
Even if you have been told you will receive X amount as an inheritance, don't count on the money or include it in your net worth statement until it's actually there. A lot of things can change between now and then.
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