FOOL SCHOOL
Calculating Your Net Worth

January 13, 2003

This is the second article in our four-part financial healthcheck. Here we look at how to calculate our net worth.

What do I own?

For this you'll need to take a piece of paper or set up a little spreadsheet. On one side list your assets - what you own and how much it is worth. On the other side (yes you've guessed it) list all your debts. It's not exactly rocket science but you might find rather revealing nonetheless.

Common Assets

• House
• Car
• Cash (current and deposit accounts including TESSAs and ISAs)
• Shares (Unit trusts and shares in companies like BT or Lloyds TSB)
• Pension fund

Common Liabilities

• Mortgage
• Credit card debt
• Other loans

If you are not sure about the value of some of these, be conservative. Once you've finished take your liabilities away from your assets to calculate your net worth. Don't worry if it is a negative number. The basic premise behind taking control of your finances is first of all to make this number positive and then increase it steadily over time without taking any unnecessary risks.

Increasing your net worth

There are three ways to do this:

• Increase the return you get from your assets;
• Reduce the amount you pay on your debts;
• Generate more money by spending less than you earn

The majority of assets earn you a return. In the list above the major exception is the car. Some of them pay out their return directly, like interest on a bank account, and some of them rise in value over time, such as property and shares. The aim of the game is to ensure that all your assets are working as hard as possible for YOU, generating the highest overall return without taking on too much risk.

Liabilities cost you money every minute of every day. It is vitally important to ensure that they cost you as little as possible. It's a key element of taking control. So avoid those with have high interest charges such as most credit cards and bank overdrafts, and pay off any non-mortgage debt as quickly as possible.

You might think this last point is so obvious it is not worth even mentioning. But there is no point trying to fill a bucket if it's got a big hole in the bottom. So, in the next article, we'll look at how to find out if you've got a hole in your bucket, how big it is, and how you can fix it.

> Financial healthcheck - Part 1 | Part 2 | Part 3 | Part 4