From Jeremy Vohwinkle,
Your Guide to Financial Planning.
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Do you really know where you stand financially? In order to get control of your finances and plan your financial future effectively, you need to first know where you stand today. How do you do that?

A Net Worth Statement is a snapshot of your current financial situation, and will give you important clues about where you should concentrate your financial planning efforts. Net Worth Statements are also useful for other purposes, such as when applying for a mortgage, credit card, car loan, or college financial aid for your kids.

Your net worth is the difference between all the things of value that you own, and all the debts you owe. In financial terms, your net worth is your assets minus your liabilities. If you have more assets than liabilities, you have a positive net worth. This is a good thing. If you have more liabilities than assets, you have a negative net worth. This is not such a good thing, but it's information you need to know.

For a general idea of what your net worth should be, based on your age and income, the authors of "The Millionaire Next Door" recommend that you multiply your annual income times your age and divide by ten. While the results are interesting, take this information with a grain of salt, since it's simply an average and doesn't take specific personal situations into account.

Calculating your net worth is fairly simple in concept. (See the Net Worth Worksheet for a sample form to use). First, list the things of value that you own, starting with:

• cash and cash equivalents, such as Certificates of Deposit, money market accounts, bank accounts
• investments, such as stocks, bonds, mutual funds, savings bonds
• retirement funds, such as 401(k) or 403(b) plans, Individual Retirement Accounts (IRAs), company pension plans, including only the amounts you are fully vested in
• real estate, including your home, if you own it, and any other real estate or personal property such as boats, cars, RVs, planes
• household goods, such as furnishings, jewelry, furs, collectibles, antiques. Use the estimated fair market value, which may be more or less than what you paid for the item. Fair market value is "the price a willing, rational, and knowledgeable buyer would pay." For cars, use the blue book value.

When you've listed everything you can think of, total your assets.

Next, list your liabilities, or amounts you owe others, starting with your

• loans, including your mortgage, if you have one, student loans, bank loans, car loans
• credit card balances, including major bank cards like Visa or Mastercard; department store cards, gas cards
• taxes owed, such as real estate taxes or income taxes
• any miscellaneous amounts that you owe

When you've listed everything you can think of, total your liabilities.

Now subtract your liabilities from your assets. Is the number positive (you have more assets than liabilities)? If so, give yourself a pat on the back and start planning on how to increase your net worth. If the number is negative (more liabilities than assets), don't despair. Read the following articles to get on the road to financial health:

Budgeting: The First Step in Financial Planning

Financial Goals: The Second Step in Financial Planning

Building a Financial Safety Net: The Third Step in Financial Planning

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