Today’s Task: Compute your net worth.

Here’s the simple formula:

Total Assets – Total Liabilities = Net Worth

Now, let’s break it down a bit. Your total assets may include your home, car, and properties (if fully paid for). Your savings, cash, and investments also fall in this category. If you have expensive jewelry, artwork, and other valuables, you can include them as well.

You probably have some assets that are difficult to estimate. For your house, you can use the estimated worth listed in your real estate tax invoices (although these tend to be too low). For vehicles, you might use its possible second-hand resale price. It’s up to you how to estimate these things, but I lean towards choosing more conservative estimates so that I don’t get overconfident. Do what works for you.

Total liabilities on the other hand, are the things you owe. You can start with the simple things such as the current balance on your mortgage and other loans, your current credit card debt (including interest), and any amount you owe friends and family. Add up all these figures to come up with your total liabilities.

Once you’ve figured out both your total assets and total liabilities, use the formula above to compute your net worth.

If you want to do this automatically, you can use this online net worth calculator I made for FrugalPinoy readers. You can click “File > Download As > Excel” to save the calculator as an MSExcel file in your computer.

Why is your net worth important?

• It can be a great source of motivation. Trent of The Simple Dollar uses his net worth to watch his own progress and inspire himself to do better financially.
• It gives you a realistic picture of your finances. Since your net worth includes your income, savings, investments, expenses, and debts, it gives you a better idea of where you are financially. Instead of just looking at your income, you’re looking at the big picture.
• It allows you to make life plans based on your financial health. You may be fantasizing about retiring at 40, but it is realistic based on your current net worth? (The same goes for other major life plans such as starting a business, buying a house, getting married, etc.)

Remember that your net worth is dynamic. It changes over time. You can compute it as often (or as rarely) as you need. Although I have a spreadsheet that computes my net worth every time it changes, it’s not necessary for me to obsess about the number that often. Once or twice a year is enough for me. Just do what works for you.

If you’re young, don’t worry about having low net worth. As long as the number is positive, you shouldn’t stress over it. After all, you have a lifetime ahead of you to build it up. There might also be other reasons why your net worth is low – you put yourself through college, you send your siblings to school, you’ve just invested in a business, etc. These things might decrease your net worth a lot, but they give you a different, more intangible value in return (for now, at least).

Did you compute your net worth today? How do you feel about it?

For the next 25 days, I’ll be posting one actionable item per day for myself and you, the readers of Frugal Pinoy.

It’s best to start off these daily actions with a definition. How do you define healthy finances? Wealth? Financial freedom? We need to know what we mean by these words if we want to achieve them.

Today’s Task: Define wealth and financial freedom.

If your definition is a specific number, why that number? Why 10 million pesos as opposed to 15 million? Is your definition based on income? Savings? Or is it a specific lifestyle? Properties such as real estate and businesses? Or is it just a state of mind?

It helps to write the definition somewhere – it could be your blog, journal, financial notebook, etc. Writing this down makes it more concrete.  Also, you can easily refer to it in the future. Remember to be as specific as possible.

As for me, here’s the definition I’ve come up with: both wealth and financial freedom means that I won’t be worrying about my family’s finances, since I know that we’ll be okay. I can only do this if the following criteria are met:

1. I have no debt whatsoever.
2. I have an emergency fund worth 1 year of living expenses.
3. I own a small house with a garden.
4. My monthly passive income covers our monthly living expenses.
5. I have a healthy “retirement” fund. (Since I’ve never been employed in the traditional sense, my definition of retirement is the time when I’m no longer physically and mentally able to work as a writer – I plan to keep working as long as I can.)

Right now, only criteria #1 is met in full. Although I live in a house, it is legally in my mother’s name. Still, I am already saving up for a house of my own. I’m halfway through #2. As for my retirement fund, it’s still small but I’m working on building it and keeping it in stronger investments (it’s still in a savings account).

How about you? How do you define these words?

Image by winjohn from sxc.hu

I recently landed on The Global Rich List website.  It’s a fascinating site, because you input your annual income and the site tells you how rich you are compared to the rest of the world.

Apparently, I’m in the top13.17% richest in the world:

If the idea of wealth comparison and materialism makes you sick, don’t worry.  The Global Rich List is not about boasting about your wealth.  In fact, the point of the site is to show you how lucky you are compared to the rest of the world.  It makes you feel rich enough to realize that you can give to others.  If you want to try it, just click here to visit the Global Rich List site.

Now, you don’t have to give to the  charity that the Global Rich List supports (Care International UK).  You don’t even have to give your money, you can volunteer your time to a cause or organization your believe in.  A few months ago, I wrote a blog post on giving to charities and causes.  Go ahead and read that post in case you haven’t done so yet.  Frugal Pinoy also has a lengthy page that lists several local charities and NGOs.  You can refer to that list if you’re looking for local organizations to support.

Why am I talking about giving again?  Well, first of all, just because we’re experiencing an economic downturn, it doesn’t mean we should stop supporting the causes we believe in.  In fact, these causes need your support now more than ever.

Also, ‘di ba mag-pa-Pasko na? Don’t forget to add these kinds of donations to your Christmas budget.

What charities and causes do you support?  How has the financial crisis affected your ability to donate?