As you prepare to invest, you’ll need to assess your net worth. It’s not hard: add up what you own and subtract what you owe. Creating a net worth statement, and updating it each year, will help you monitor your financial progress and meet financial goals. It will also enable you to calculate how much you have (or don’t have) to invest.
The first step in this process is to determine the total amount of your assets. Assets are your possessions that have value—for example, money in bank accounts, stocks and bonds, personal property, your home or other real estate.
Once you’ve calculated your assets, determine the total amount of your liabilities. Liabilities are financial obligations, or debts. Examples include credit card balances, personal or auto loans and mortgages.
Once you’ve calculated the total amount of your assets and liabilities, subtract the total amount of liabilities from the total amount of assets. Ideally, you’ll want to have a greater amount in assets than liabilities.
If your assets are more than your liabilities, you have a “positive” net worth. If your liabilities are greater than your assets, you have a “negative” net worth. If you have a negative net worth, it’s probably not the right time to start investing. You should re-evaluate your finances and determine how you can decrease liabilities—for example, by reducing your credit card debt. If you have a positive net worth and cash flow, you’re probably ready to start an investment plan.
Here’s a simple net worth worksheet that can help you get started. It’s a good practice to calculate your net worth on a yearly basis.