Net worth provides a quick look at your overall financial health. This simple number is calculated by subtracting the dollar value of all of your debts from all of your net worth. Knowing your net worth can help determine where you are on your financial journey – and most importantly, where you want to go. Read on for a quick guide on how to calculate your net worth.
What is net worth?
Net worth is calculated by subtracting all of a person’s liabilities from their total net worth. If a person also owns intangible assets – such as intellectual property (IP) – those can also flow into their net worth. In this case, the value of the intangible assets (in addition to liabilities such as debts) is also deducted from the balance sheet total. This is known as net tangible wealth.
Tangible net worth is generally more relevant to companies than to people. For example, if a company is sold or liquidated, its value needs to be determined. This is done via a net tangible wealth calculation that would take into account a company’s intangible assets such as copyrights. However, since we are focused on personal finances, we will focus on making it easier to calculate net worth.
Is wealth important?
Net worth is valuable because it can indicate your overall financial stability. It is different from other financial indicators like income. For example, if you make a lot of money but have a lot of debt and tend to spend too much, you may not have a very high net worth. Recognizing this can be the first step in improving your money management – for example through a conscious spending plan.
It won’t do you much good, however, to look at net worth in a vacuum. Don’t just focus on your current net worth. If you want this information to serve you well, it is a good idea to track your net worth over time. Ideally, your wealth will grow with age. The good news is that most people do. A positive growing wealth can help you achieve life goals like FIRE (Financial Independence, Retire Early).
It can also help get a sense of your net worth compared to other people your age. If you are not happy with your current number, there is something you can do to improve it. This generally involves reducing your liabilities first by paying off your debts, growing your money through various investments (401 (k) s, Roth IRAs, stocks, bonds, mutual funds, etc.), and making more through multiple streams of income.
How to calculate your net worth
Before you can start working on improving your net worth, you need to find out where you stand. What is your current baseline? The financial calculator for net worth is pretty simple:
Assets – Liabilities = Net Value
But what is an asset or a liability? To make it even easier, we’ve broken it down for you below.
Calculate your wealth
To calculate your net worth, first make a list of all of your assets and determine the dollar value of each asset. A simple two column worksheet should cover all of the information you need. Assets include cash and any goods that you can sell for cash or liquidate. These include:
- Bank accounts (e.g. checking accounts and savings accounts)
- Retirement plans, including 401 (k) s and Roth IRA retirement accounts
- Investments such as index funds, exchange traded funds (ETFs), stocks, bonds, certificates of deposit (CDs) etc.
- Real estate, including your primary residence (what value it is valued at) and any other real estate such as rental properties, holiday homes, etc.
- Present value of life insurance accounts
- Other personal items such as cars, jewelry, collectibles, etc.
Calculate your liabilities
The next step in calculating your personal net worth is to make a list of your liabilities and determine the dollar value of each liability. Again, a simple two-column table should contain the information you need. Liabilities consist of funds that you owe to a bank, individual, lender, or other legal entity. These include:
- Consumer debt such as credit card debt
- Student Loans
- Car loans
- Payday loan
- Home loan
- Personal Loans
- Mortgages on real estate that you consider an asset
Calculate assets – liabilities
Once you’ve completed your two lists of assets and liabilities, add the dollar amount of each one. Then use the net worth equation to calculate the result:
Assets – Liabilities = Net Value
Here is a quick example of what a final net worth calculation might look like. Let’s say you calculate the value of your wealth and it looks like this:
|Current market value of your home||$ 300,000|
|saving account||$ 20,000|
|checking account||$ 8,000|
|Investment portfolio||$ 50,000|
|Total assets:||$ 400,000|
Now calculate all of your liabilities. This could look like this:
|Home mortgage||$ 150,000|
|Car loan||$ 5,000|
|Credit card||$ 10,000|
|Student Loans||$ 20,000|
|Total assets:||$ 185,000|
Now you can calculate your net worth. Just subtract as follows to get the total:
$ 400,000 – $ 185,000 = $ 215,000
Remember that your personal net worth will fluctuate over time, so it pays to calculate at least once a year. The number changes based on how your personal liabilities and assets develop and how the money market changes. For example, you could pay off a credit card balance to reduce debt, or your savings account could be affected by low interest rates, slowing asset growth.
Improving your financial future starts now
Calculating your net worth can be intimidating at first. What if you are not happy with your number? Don’t let this mindset put you off. Remember, you can always improve your net worth – for example, by paying off debts, investing and increasing your income. The real danger is not knowing your net worth at all. This is a valuable indicator of financial health that goes beyond basic things like income.
Fear and anxiety related to money-related issues like wealth will ultimately prevent you from reaching your maximum earning potential. If you want to make your money work for you, be ready to talk about financial topics. Knowledge is often the first step in improving your financial situation.
Being financially savvy doesn’t mean you have to become a money-obsessed penny pincher. The “I Will Teach You To Be Rich” approach offers straightforward asset management and financial information that you can implement on a day-to-day basis. Philosophy does not require you to lead a spartan life and deny yourself all joys. Rather, it’s about understanding your money – why you’re spending the way you do it – and focusing your spending on things that you really love.