Before you can get where you want to go, you need to know where you are. The GPS in your car is useless if it can't pinpoint your current location. The same is true for your money.

You want to become debt free, or own a home. You want to travel the world, or go back to school, but before you can develop your plan to get there, you need to know where you are.

What you own minus what you owe. I call it your financial GPS, but its better know as your "net worth" (a big name for something so simple.)

Net worth is what you own minus what you owe. You own what are called "assets" - like a house, a car, retirement savings, maybe even jewelry, and you owe what are called "liabilities" - like a mortgage, a car loan, a student loan or credit card debt. There are 3 simple steps to figuring it out.

To come up with your net worth you first add up what you own, your assets. For example:

Assets
House $300,000
Retirement savings $30,000
Checking account $1,000
Car $15,000
TOTAL ASSETS $346,000

Then add up what you owe, your liabilities. For example:

Liabilites
Mortgage $250,000
Line of credit $3,000
Credit card debt $5,000
Car loan $8,000
TOTAL LIABILITES 266,000

Now, take your assets and subtract your liabilities, for example:

ASSETS ($346,000) - LIABLITIES ($266,000) = NET WORTH ($80,000)

In this case the number is positive, but the number could also be negative - even way, way negative. It doesn't matter so much what your net worth is today - you can't easily compare it to any one else. What does matter is how it moves over time. Generally speaking, you want it to keep going up over time so that you have some money to pay for groceries when you stop drawing a paycheck.

But you can't tell if it is going up or down if you don't know what it is.

Get a read of your financial GPS once a year. Your net worth is a snapshot of your finances taken on the day you do it. Take that snap shot once a year as your prepare your income taxes.

You'll be surprised how it moves over time!
Published 06/07/2012