New York (CNN/Money) -
Once in a while, you should ask yourself, "What am I worth?" It's not a metaphysical question; it's a practical one.
A net worth assessment, the annual check-up of personal finance, reveals whether your fiscal health has improved or deteriorated. It involves adding up everything you own and subtracting from that everything you owe.
It's a powerful tool to help guide you toward your financial goals. "People need to know where they are so they can get to where they want to go," says Bill Constain of the Manhattan Planning Group.
If you've never tallied your net worth, says Constain, "It can be an eye opener."
Sometimes the news is good and clients are pleased to learn they have more money than they thought. More often, Constain says, clients find that their plans have derailed. They then have to curtail their dreams, cut back on their lifestyle, or figure out a way to make more money and get back on track.
Not so simple arithmetic
A net worth audit can get complicated. Calculating the value of your savings, checking, retirement accounts, bonds, and equities, as well as credit card, student, and other debt, should be a snap. Grab most of those numbers right off bank and brokerage statements.
Assigning a dollar figure to other assets may not be so easy.
How do you keep track of housing prices that seesaw from year to year? Furniture, jewelry, artwork, and other items are even harder to estimate. You might pay $1,999 for that Eames chair, but could you find a buyer at that price? And, short of attending an Antiques Roadshow, how do you figure the worth of your century-old collection of Bushwhacker baskets?
Relax. It's more important to establish a baseline -- something to compare with later assessments -- than to attain perfectly accurate numbers; just make your best estimates. Then, it becomes simple arithmetic.
Marilyn Capelli Dimitroff, president of Capelli Financial Services in Bloomfield Hills, Mich., advises her clients to compute their net worth every year.
First look at the grand total, she says, then break that out into two different classes: personal assets, such as your house and car; and working assets, the accounts and investments you need to provide for your future.
Net worth can be deceiving, says Capelli Dimitroff. You should, for example, keep liquidity in mind. "If you're worth $1 million, that sounds pretty good. But if $900,000 is tied up in home equity, that's not healthy," she says.
"When you retire you need this army of numbers," she says, to support your planned lifestyle. That army usually comes from working assets, not personal ones.
So even if your total net worth grows, you may be worse off if your working assets don't. Many people took comfort, during the stock market meltdown, when their net worth stayed stable or even rose because their house values swelled. But few people ultimately reap big cash windfalls from home-price increases.
"People say when they retire they'll move to a smaller place," says Capelli Dimitroff. "But over the years I've only had one client who ever moved to a less expensive house."
Financial planners often use a net worth assessment to shock clients into stepping up savings. Sometimes just a little tweaking, like trimming wasteful spending, can boost your balance sheet.
In other cases, you may choose to switch to higher growth investments. But this also entails higher risk, so first take a good look at your risk tolerance and estimate your time horizon. Make sure, if the investment flops, you have both the temperament to shrug off the loss and the time to recoup it.
"You want to be able to sleep at night," says Constain.
Capelli Dimitroff advises using payroll deductions or automatic investing plans to build working assets. "Most of us are good at paying bills but bad at saving," she says. If you treat investing like a monthly bill, you'll save more. Since the automatic deductions never actually reach your wallet, you may never miss them.
Bill Constain advises clients to have quarterly audits. After the excitement of putting together the initial financial plan fades, many advisors lose interest and put portfolios on autopilot. Frequent audits keep advisors focused and plans fresh.
The same can apply to do-it-yourselfers, but don't overdo it; you'll drive yourself crazy. Capelli Dimitroff says that some people were "figuring their net worth daily during the late 1990s stock market boom."
Financial planner Rick Adkins of the Arkansas Financial Group in Little Rock pays extra attention to comparing a client's net worth with debt. "If someone is highly leveraged, that's a red flag," he says. "High-interest debt can eat into assets very quickly."
When the person nears retirement, "You want the assets to be as unencumbered by debt as possible," says Adkins.