How much do we really have?

Have you ever bought something on credit only to realize you owed more on it than it was worth the next day? The first car Kerri and I bought was like that. We borrowed nearly the entire purchase price and as cars do, it started depreciating faster than we paid for it.

Calculating net worth is the exercise of figuring out everything you own, everything you owe and subtracting your owes from your owns. Net worth is second behind cash flow in determining your ability to build wealth. It's actually your primary metric for whether you're building wealth.

What you own:
Figuring out what you own is usually pretty easy. Figuring out how much it's worth is a little harder. Start by making a list of all of your major assets.

The things I recommend including are savings accounts, retirement accounts, home, vehicles, and possibly some of your toys worth more than $1000 like ATVs or RVs. Some advisors would suggest you not count vehicles and toys. I prefer to count them because you can sell them. I suggest using a very conservative valuation for both.

The things I would not include are furniture, animals (they die), anything consumable, and toys worth less than $1000.

Assigning a value to all of your assets can be really difficult. We'll talk through each of them.

1. Savings or retirement accounts: These are easy. Just grab your latest statement.
2. Home: You can assign value of your home based on a variety of things. Before the real estate boom crashed, I used the purchase price of our home. Since then I have started using online tools like zillow.com. They keep track of sales in your area to determine rough values.
3. Vehicles: I use kbb.com or nada.com to value my vehicles then I use 80-percent of the worst value they list (usually trade-in). I use this conservative approach because I'm confident I could sell them for that low amount if I ever needed or wanted to.
4. Toys: I don't have a lot of experience with toys, but my approach has been to watch local sites (in Utah KSL.com is best) to see how much sellers are listing their toys for. KSL.com allows sellers to mark items sold, so you can see what a sold item was listed for. I suggest being extermely conservative with toys and valuing them at 60-percent of what you see them selling for.

Assigning value to what you owe is easy. Get all of your statements out and write down the amount owed.

When you are finished with the exercise, you should have a table that looks like the one below.

What if you have a negative net worth? A negative net worth occurs when what you own is worth less than what you owe. Regardless of whether you have a negative or positive net worth, the goal is usually the same. You want to improve it.

Net worth can be improved either through cash flow or asset appreciation. We've covered cash flow at length. Asset appreciation occurs when the value of an asset increases. One of the reasons to invest in a stock based mutual fund is long-term growth or appreciation.

Over the last couple weeks we've looked at setting goals, measuring cash flow, and calculating net worth. These three tools are a significant part of a personal finance foundation.

What are the other things you consider foundational finance principles? I'd enjoy learning and / or writing about them.