With that said, here are a few excerpts from his entry from May, 2007, on calculating your net worth (see full entry here):
… your net worth is one thing only: the value of all your assets reduced by the value of all your liabilities.
Figuring out the liability part is easy, as most people are well aware of who they owe money to. However, the asset part of that is where we tend to overlook important items. An asset is any item you own that is convertible into cash. So truly calculating your net worth would be like having a huge yard sale and assigning a value to your every possession… from your home, cars, and mutual funds... down to your furniture, dishes, socks, and underwear (good luck finding a buyer!). For more details, see Flexo's other entry, "Are Clothes a Part of Net Worth?". As he points out in the original post,
...you’re unlikely to liquidate clothing, so (including such things in) the number may be meaningless for you. In the same respect, your car is not a financial asset the same way money in the bank is, so there may be no reason for you to track its value from month to month.
And in general...
While it’s a great idea to treat your personal finances somewhat like a business, it shouldn’t have to be an excessive chore. Since the purpose of the calculation isn’t to compare yourself with others, it doesn’t matter what you choose to include as long as you’re consistent each month, and the numbers are meaningful to you.
So with that said, in continuing to track our financial progress, I’ve decided to use two different pseudo-net worth figures. I’ll call the first one our liquid worth, which is simply our on-hand cash minus our outstanding non-mortgage/auto debts. There are no large assets (e.g., rental properties & autos) included in this calculation since that’s not money that we can usually get to quickly or reliably if we had to. This figure will give us a better idea of how much money would we have on hand immediately if financial hardship struck TODAY.
I'll call the second pseudo net worth figure our extended worth. This is more of a long term measure and takes into account the liabilities and wealth building tools that I left out the first time (cars, primary residence, & rental properties). And without further ado, here is our first net worth snapshots:
Obviously, we'd have to sell 3 houses and a 2 cars in order to get a hold of our extended worth, so that's not all that helpful of a short-term measure. And unfortunately our liquid worth is still negative... which is a big problem since owning two rental properties and a primary residence means that for any given month we can be on the hook for $3700 of mortgage payments between the three... and that expense would be before we tack on an additional $3600 per month (on average) for food, electricity, water, diapers, car insurance, internet service, medical co-pays, child care, home security, cell phones, debt payments, gas, etc. (And suddenly I understand why Dave Ramsey said don't buy investment property if you're broke). So, needless to say, we've got some work to do in order to reduce our overhead and build a sturdy buffer (i.e., emergency fund) between peace of mind and a financial tragedy waiting to happen.
And hey, at least now when we become debt-free, climb to a positive liquid worth, and eventually skyrocket past the 6 figure net worth mark, you can look back and say "Wow... I remember them when they were in the hole like a prairie dog on a rainy day. But look at them now." ... and hopefully you'll be right there with us. Not asking to borrow anything, but instead reminding us of how you did the same exact thing, got on board from the beginning, and achieved your own personal financial goals; whatever they are.
See you at the finish line.
