How to Calculate Your Net Worth

Car Values

Use the current market value rather than the price you paid, since the current market value is a better approximation of the price you would get today if you sold your car. Visit a site like edmunds.com or kbb.com to get an estimate of your car's current value. Since car values may not change in price from day to day or even month to month, you can update your car's value every 6 to 12 months in your net worth sheet, rather than on a more regular basis (i.e., you can use the same value for 6 to 12 months).

House Values

First, determine the current estimated value of your home. Websites like zillow.com and trulia.com can provide these price estimates while also allowing you to review recent sale prices of comparable homes. The value to use in your net worth sheet will depend on the relationship between the price you paid and the current estimated price.

• Current Price ≤ Purchase Price: Use current price for your house value.
• Current Price > Purchase Price: If the current price is greater than the purchase price, I suggest using the average of both figures instead of simply using the current estimated price. This helps to avoid artificially inflating your net worth if the estimated house values are wildly different than reality. In addition, in most instances, homes are more illiquid than other financial assets (i.e., they take longer to sell), so the current estimated price may be much higher than what you are able to get when you sell. Lastly, this methodology helps you build in some cushion to factor in transaction costs (i.e., closing costs) and taxes that you may have to pay upon selling your home.

Similar to updating car values, you can update house values in your net worth sheet every six to 12 months unless there's a significant change in the market. If you have other physical assets in addition to your home and car that are worth at least $5,000, you might wish to add them to your net worth statement as well.

How to Figure Out Your Burn Rate

My preferred method for figuring out your burn rate involves using a good ol' Excel spreadsheet and an automated financial portal that compiles financial information from across your accounts, such as mint.com or personalcapital.com. You can use the burn rate template at www.workyourmoneybook.com to get you started, or you can create your own (based on the example template in Table 4.2).

I recommend that you follow these best practices when creating your burn rate sheet so that you can gain valuable insights into your spending patterns without needing to do any additional digging.

• Estimate Monthly and Annual Costs: Create two columns to estimate each expense on a monthly and annual basis. This will help you see the annual amount you spend on monthly costs, as well as break down the implied monthly cost of annual expenses. You will also be able to compare your annual expenses to your annual net income, so that you can understand whether you have any extra savings available.
• Bucket Expenses into Categories: List expenses under three main categories:
  • Fixed Monthly Expenses: These include recurring expenses that don't change from month to month, such as housing (rent or mortgage), non-mortgage debt (student loan), childcare and/or school, transportation (car, gas, tolls, public transportation), insurance (health, renters/homeowners), utilities (phone, cable, internet), and other fixed expenses (like a gym membership).
  • Variable Monthly Expenses: These include expenses that occur every month, but may differ in amount, such as food (groceries, dining out, ordering in), entertainment (bars, concerts), beauty and personal care, dry cleaning, and shopping.
  • Annual Expenses: These include expenses that may only occur once a year, such as vacations, certain insurance payments, repairs (home, auto), and professional fees (accountant, financial planner).

Getting the Data

You may know many of your fixed monthly costs, such as your rent or phone bill, right off the top of your head. Otherwise, you can look at your last bill, your latest credit card statement, or your financial portal of choice to track down those figures. For variable monthly expenses, you can estimate the average monthly amount you spend per category by reviewing your credit card statements or financial portal information over the last three or four months.

When filling out your fixed and variable monthly expenses in your burn rate sheet, simply:

• Complete the monthly cost column.
• In the annual cost column, multiply each of those monthly expenses by 12 to get the annual cost.

For annual expenses, you can take this reverse approach:

• Fill in these costs in the annual cost column.
• In the monthly cost column, divide each of the annual expenses by 12 to calculate the figure for the monthly column (while understanding that many of these expenses, such as vacations or emergency health costs, may not be monthly at all).

Are You Saving Any Money?

Now that you've calculated your annual burn rate, compare that figure to your annual net income to understand whether you are saving any money. You can determine your net income by using your last paycheck from the previous year or an online tax calculator.

To use your paycheck, look at your last paystub from the previous year. From your total gross income, subtract the taxes paid (e.g., federal, state, local, Social Security, Medicare). Alternatively, you could simply take your net income and add back any expenses you may have already tallied in your burn rate template, such as health insurance premiums and transportation costs, or any items that are not expenses, such as contributions to a 401(k) account.

For using an online tax calculator, input your gross income into an online tax calculator, such as the one offered by SmartAsset. The tool will estimate the federal, state, and local taxes you'll owe, and will output a net income amount.

Once you've pinpointed the relationship between your net income and living expenses, you can determine whether you're saving any money:

• Net Income < Expenses: You're not saving, likely racking up high-cost debt, and decreasing your net worth.
• Net Income = Expenses: You're not saving, simply breaking even, and neither adding to nor subtracting from your current net worth.
• Net Income > Expenses: You're saving and building your net worth.

Minimum Salary to Cover Burn Rate

In addition to being able to calculate how much you're currently saving, knowing your burn rate will allow you to determine the minimum salary you'll need to cover your living expenses. To calculate this, input various gross salaries into an online paycheck calculator to solve for the minimum income that will cover your annual burn rate.

Payment History (Weight: 35%)

The biggest factor in determining your credit score is your payment history. Consistently paying the amount due on your loans and credit cards on time could help improve your credit score, while not doing so may result in your credit score trending downward.

The lower your credit score, the less likely lenders will be willing to lend you money because there may be a higher chance they won't get all of their money back. And if lenders do end up lending you money, they may charge you higher interest rates.

This makes total sense. Picture two friends; let's call them Brad and Jordan. Both friends often ask you to borrow money for various reasons. Brad always remembers the amounts he borrows from you and promptly pays you back. Jordan, on the other hand, frequently forgets he even borrowed money from you, causing you to stress about if and when you should follow up with him, or if you should send him a passive-aggressive payment request via Venmo. Which friend are you more likely to lend money to in the future?

Credit Utilization (Weight: 30%)

Before jumping into what credit utilization is, let's clarify the main types of credit, which include installment loans and revolving credit. An installment loan, such as a mortgage or student loan, allows you to borrow a fixed amount of money, with required monthly payments based on a set schedule. For example, if you borrowed $400,000 via a 30-year fixed-rate mortgage at an interest rate of 4%, you would be required to pay $1,910 each month for 30 years. Revolving credit, on the other hand, allows you to borrow freely up to a set credit limit, and generally has required minimum monthly payments. Credit cards and home equity lines of credit are examples of revolving credit.

With that context, credit utilization, the second-largest factor in determining your credit score, is just a fancy term for describing the proportion of the total borrowing limit you're using on your revolving credit. Generally, the lower your credit utilization, the better your credit score. As an example, let's say across three credit cards you have a credit limit of $30,000. If you consistently have a balance of $15,000 outstanding across those cards, your credit utilization would be 50%, which is very high. Lenders like to see credit utilization below 30% for each account, and overall.

Length of Credit History (Weight: 15%)

The third-largest factor in determining your credit score is the length of your credit history, or the average age of your accounts. Lenders look more favorably upon borrowers with longer credit histories than those with short credit histories. This is one reason why people often seek advice on whether they should cancel a credit card that they no longer use or that carries a high annual fee. Although the answer may seem like an obvious yes, cancelling a credit card can negatively impact your credit score.

New Credit and Credit Mix (Weight: 10% Each)

The last two factors, new credit and credit mix, each carry a 10% weight.

New credit refers to whether you've opened up a lot of new credit lines in a short period of time. FICO has found that having a lot of new credit makes you a greater risk to lenders.⁴ So the next time you're trying to take advantage of a lucrative credit card sign-on bonus, be mindful that it could impact your credit score.

Credit mix looks at whether you're using both installment loans and revolving credit, or just one type of credit. While using both credit types is viewed as more favorable in the eyes of lenders, this is often a tougher factor to control since it's based on your personal needs.

Reviewing Your Credit Reports

It's important to review your credit reports periodically to ensure the information is accurate, and to confirm that no unauthorized accounts have been opened under your name. Luckily, you are entitled to one free credit report a year from each of the three credit reporting agencies. While you could request all three credit reports at the same time, I recommend you request one credit report at a time every four months. This method allows you to track your credit report throughout the year, rather than just once a year.