What is my net worth? Some people love to calculate their net worth from time to time. There are others who avoid doing it as ignorance is bliss especially when the truth can be painful sometimes.
Recently, I went to one of my favorite financial blogs, â€œThe Simple Dollarâ€ referring to the same subject and the author Trent, made a big change in the way he calculated his net worth. Previously, he included his home and automobiles which gave him a nice positive net worth. He has decided to eliminate the value of his home plus the value of the automobiles and consequently, this puts him into negative net worth territory.
Calculate your net worth
It depends on your personal choice on how you want to calculate your net worth. The easiest and basic formula is, â€œNet worth = All assets – All liabilitiesâ€. This is what I used to calculate my own net worth. As opposed to Trentâ€™s method, I do include the value of my house, cars as well as other properties in my net worth calculation.
Another method of calculating net worth which is derived from a survey can be found in the popular book â€œThe Millionaire Next Doorâ€ by Thomas J. Stanley and William D. Danko. Their formula tells you what your net worth should be right now based on your age and income.
The formula extracted from the book is:
â€œMultiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.â€
For example, if you are 30 years old now and makes RM50,000 a year and you also have investment returns of RM10,000 a year, multiply RM60,000 (RM50,000 + RM10,000) by 30. You will get RM1,800,000. Divide this amount by ten and you will get RM180,000.
The authors also define which category you belong to in terms of wealth accumulation. By following the example above, multiply RM180,000 by two to get RM360,000 (RM180,000 x 2). If your current net worth meets this figure and above, then you are known as a PAW (prodigious accumulator of wealth). If not, you are either a UAW (under accumulator of wealth) or an AAW (average accumulator of wealth).
I do not have to ask which category you want to belong to. It is normal to want to be known as a PAW, striving to build your personal wealth. Personally, I like the basic formula and I do not worry too much if I am not a PAW as long as my net worth is a big positive number and remains so until I reach old age.
Do you have a personal formula for calculating your own net worth? Do you follow Trentâ€™s method of excluding your house and automobiles as assets?
Reference book: The Millionaire Next Door by Thomas J. Stanley & William D. Danko, 1996 Pocket Books