By Toni Case

Viewing ourselves as a commodity to be bought and sold on the market isn’t the most pleasant exercise, but the concept underlying it – the calculation of net worth – is a useful activity. Calculating your net worth and comparing it over time can give you a ballpark figure as to where you sit financially. Think of it like taking a financial fitness test. So where do you stand today?

Your net worth is the amount by which assets exceed liabilities. In other words:

Net worth = Assets - Liabilities

Assets include things that you own. Now, before you start adding up the cost of the leather couch, the four-wheel drive and plasma TV, stop right there. Assets include just those things that you can resell for decent money (sorry - selling the TV on eBay doesn’t count).

So let’s add up the assets that really count – such as your residence, investment properties, holiday home, shares, super funds, partnerships in businesses, trust funds and other more esoteric investments such as lucrative art or coin collections. Now remember, regardless of how much you forked out on them – jewellery, cars and clothing don’t count. Indeed, be careful of what you buy because it’s often worthless as soon as you wheel it out the shop door.

Now, let’s take a look at liabilities, or in other words – debt. To get a figure for total liabilities you must add up everything that you currently owe to the bank and other financial institutions including credit and store cards, home, investment and business loans and other outstanding debt.

Once you have deducted liabilities from assets, you can arrive at a figure for your net worth.  Over time, if your net worth is rising then clearly you’re on the right track. Beware if your net worth is on the decline. It’s easy to rack up debt thinking that you have plenty of time to pay it back.

The Millionaire Next Door by Thomas Stanley and William Danko offers a formula for calculating your ideal net worth that can be used as a benchmark for comparison.

Net worth = Age x Pretax income ÷ 10

By punching in your age and pretax income, you can calculate a benchmark figure for your net worth. If your real net worth calculation comes in above the benchmark, you’re doing well. If not, then possibly you have some changes to make.

Clearly, the higher your age and the greater your pretax income, the higher your ‘benchmark’ net worth will be. If you have been sitting on a hefty salary for years and you have nothing to show for it other than a mega music collection and a wardrobe full of designer clothes, then you will fail the test.

According to a survey by the Melbourne Institute’s Household, Income and Labour Dynamics the average net worth of Australian households surged more than 50% between 2002 and 2006, hitting an impressive $608,000.

Clearly, the timing of buying and selling assets will impact your net worth. Had you purchased property before the recent boom, your net worth will reflect the ensuring asset price bubble that occurred in the property market. Similarly, prior to this year, super fund returns were boosted by healthy sharemarket returns, but today, many super funds have been dragged under by the global credit crisis. Both events will impact your net worth either positively or negatively.

If your net worth is negative, then you have some work to do. A low income makes it more difficult to build your net worth – so possibly you should try and boost your income by seeking a higher-paid job, or even taking on a second job. And if income isn’t the concern here, then cutting your spending and paying off debt is the key to turning your situation around.

More articles from this edition of FatCat:

Will your super fund ever recover?

Are you worth $25 or $2 million? Take the test.

Important tax tips for landlords

Don't wait for the next rate cut, but attack your mortgage by implementing some simple strategies.

Should I sell the house and invest in shares instead?

21 economic models explained with cows

Financial goal setting