My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.


By Topics

Overall:
0. About (10)
1. My Progress (139)
2. Car & Home (107)
3. Credit (138)
4. Banking (33)
5. Saving (49)
6. Investing (308)
7. Taxes (89)
8. Spending (74)
9. Misc (97)
A. Archive (49)



MONTHLY ARCHIVE

Feb 2014 (3)
Jan 2014 (6)
Jan 2012 (1)
Apr 2011 (1)
Mar 2011 (1)
Feb 2011 (1)
Jan 2011 (1)
Dec 2010 (1)
Oct 2010 (1)
Sep 2010 (1)
Aug 2010 (1)
Jul 2010 (1)
Jun 2010 (1)
May 2010 (1)
Apr 2010 (1)
Mar 2010 (6)
Feb 2010 (2)
Jan 2010 (7)
Dec 2009 (3)
Feb 2009 (4)
Jan 2009 (8)
Dec 2008 (1)
Jun 2008 (2)
May 2008 (2)
Apr 2008 (5)
Feb 2008 (3)
Jan 2008 (15)
Dec 2007 (32)
Nov 2007 (6)
Oct 2007 (8)
Sep 2007 (9)
Aug 2007 (24)
Jul 2007 (2)
Jun 2007 (1)
May 2007 (3)
Apr 2007 (4)
Mar 2007 (4)
Feb 2007 (13)
Jan 2007 (6)
Dec 2006 (3)
Nov 2006 (7)
Oct 2006 (7)
Sep 2006 (6)
Aug 2006 (4)
Jul 2006 (10)
Jun 2006 (1)
May 2006 (3)
Apr 2006 (2)
Mar 2006 (6)
Feb 2006 (6)
Jan 2006 (3)
Dec 2005 (1)
Nov 2005 (9)
Oct 2005 (8)
Sep 2005 (13)
Aug 2005 (25)
Jul 2005 (16)
Jun 2005 (17)
May 2005 (19)
Apr 2005 (20)
Mar 2005 (24)
Feb 2005 (23)
Jan 2005 (36)
Dec 2004 (40)
Nov 2004 (34)
Oct 2004 (17)
Sep 2004 (21)
Aug 2004 (59)
Jul 2004 (37)
Jun 2004 (31)
May 2004 (29)
Apr 2004 (52)
Mar 2004 (49)
Feb 2004 (49)
Jan 2004 (31)
Dec 2003 (48)
Nov 2003 (52)
Oct 2003 (29)
Sep 2003 (8)
Aug 2003 (5)
Jul 2003 (2)
Jun 2003 (2)
May 2003 (5)
Apr 2003 (2)
Mar 2003 (2)
Feb 2003 (3)
Jan 2003 (29)



 

Conservative Net Worth Accounting

Contributed by mm | August 12, 2004 8:46 AM PST

Oftentimes we use net worth to measure one's financial success, but actually different people define net worth differently. If you ask two accountants to calculate net worth on the same thing, you may get different results. I am a true believer of the importance of sensible net worth acconting. After all, without the right yardstick, you really don't know how far the destination is.

If you read PFBlog long enough, you know I deploy a set of conservative personal accounting rules, and have a system to calculate my net worth regularly. Some of my tips:

Tip 1: Only include those items which you will sell them for cash some day, and keep good track of their true value.

Without much saying, your cash, checking accounts, saving accounts and investment accounts are your assets. And you can get an accurate fair market value almost anytime.

Is your home your asset? Yes. Even if you want to live in your nice comfy house for the rest of your life, you can still extract cash via home equity loans or reverse mortgage. Be careful when you report the value of your house. To be conservative, I only report a value of less than $320k for my house while the same house was sold for $350k+ recently.

How about your car? Yes, but also the proper valuation is the key. I put a depreciation entry to my personal finance software for the cars and calibrate the accounting value and the market value regularly. The accounting value for my cars are regularly 10-15% below the market value provided by Edmunds.com.

And your furnitures and electronics? Most of the time you will not sell your furniture, and a yard sale may only land you 1/10 of your purchase price, so you'd better not to keep them in your accounting book.

Actually, my house and two cars are the only non-liquid assets in my net worth calculation.

Rule 2: Make Proper Accrual for Your Liabilities

Credit card balance, mortgage and home equity loans and auto loans are certainly your liability, but your liability can be more than that. For example, if your mortgage is not associated with an escrow account, you should still accrue your property tax and insurance. having to pay property tax on May 1 does not mean it only becomes a liability on that day.

Another example is tax. If you sell a stock in your after-tax account for a profit, you are subject to capital gain tax. Your broker may not withhold the tax, but it is your liability anyway, and you should not wait until the tax deadline of April 15 to recognize it.

I also regularly accrue a monthly amount for the maintenance of my house and cars, because we know at one point of time they will need some facelift or heart surgery.

Rule 3: Calculate Liquidation Value Too

If you need to liquidate everything in the next 30 days, will you get the amount in your accounting book? This is where I find setting up another metric of liquidation value will help. Transaction costs come to play when you need to sell your house (realtor commissions and taxes), your car (mark-down by dealer) and even your 401(k) account (government will assess tax on the withdrawal). Take a look of my formula for liquidation value calculation.

The same CNN Money article I quoted for net worth stackup, is also a good reading for reasonable net worth accounting.

More PFBlog Articles You Might Find Interesting ...



Read More ... 138 Posts In The Same Category










This page was last rebuilt at January 27, 2014 07:46 AM PST.
 

RSS FEED





PERSONAL FINANCE BLOGS I READ

Consumerism Commentary
Get Rich Slowly
My Money Blog
All Financial Matters
The Simple Dollar






.

Error 500 - Internal server error

Error 500 - Internal server error

An internal server error has occured!
Please try again later.



Copyright 2003-2014, PFBlog.com. All Rights Reserved. (Privacy Policy)