When each new year begins, I have adopted a series of financial traditions. One of those is to get an accurate accounting of my net worth, and then making any necessary tweaks to my financial plan for the upcoming year.

I do this in an Excel spreadsheet in which I have all of the various financial categories separated out. I can look back over time and get a clear picture of performance over time.

Today I want to talk about that process.

Assets and Liabilities

At a high level, calculating your net worth involves adding up all of your assets and subtracting all of your liabilities.

I break my accounts down into retirement accounts — such as my 401k, my Individual Retirement Account (IRA), and my Roth IRA — and non-retirement accounts. I have all of my accounts linked together at Fidelity, and it makes the calculation much easier than in my pre-Fidelity days.

For both of these categories, I first separate out the cash equivalents. This category includes things like certificates of deposit, checking and savings accounts, Treasury bills, money market accounts, and cash.

Then I tabulate the investments. This category includes stocks, bonds, and mutual funds. Although not applicable to me, you might also have annuities, pensions, and a cash value for your life insurance.

One critical item at this stage is to check your beneficiaries. In the event of your death, is it clear where your assets would go? You don’t want to leave your loved ones with a chaotic situation, so this is a good opportunity to review and update the beneficiaries on your accounts.

Finally, I look at tangible assets. One category is real property, like my house and a few acres I own. The other is personal property. I don’t get too granular on this, but you can include things like vehicles, jewelry, and collectibles.

I add all of these categories to get the total value of all my assets.

Then I add up my liabilities, which in my case is just a mortgage. But you may have credit card balances, personal loans, car loans, and student loans.

Subtract your liabilities from your assets, and hopefully that’s a nice positive number.

Tweak Your Plan

I then begin analyzing the numbers versus previous years. Hopefully your liabilities are decreasing and your assets are increasing. If not, this is a good time to identify areas in which you need to make a change.

I compare the change in net worth to previous years. What went right? Where did things go wrong?

One area I always focus on is the ratio of my retirement accounts to my non-retirement accounts. I know people that have fat retirement accounts, but not much outside of their retirement accounts. You want to have a balance so you have disposable cash in the event of an emergency.

Also, as you approach retirement, you want to ensure that you are reducing the risk profile of your portfolio. Lighten up on the aggressive stocks, and beef up on safer stocks and bonds, to ensure that you don’t incur huge losses just before you retire.

After adding everything up and analyzing the accounts, I make a few notes on what needs to change for the upcoming year.

But it all starts with an accurate accounting of net worth at the beginning of the new year.

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