Understanding your net worth is a critical step in your financial journey and plays an important role in developing financial abundance. As you learn to organize your finances, which we discussed in this post, you will need to know where you stand in your financial life and this begins with knowing your net worth.
What is Your Net Worth?
The simple definition of your net worth is the dollar amount of your assets minus your liabilities. Basically, it’s an inventory of all that you own minus what you presently owe. To calculate your net worth, you will list all your assets and subtract them from your liabilities (or debts). Before we jump into a step by step guide of how to calculate your net worth, let’s first define the key terms we used above: assets and liabilities.
What is An Asset?
An asset is everything you own that has a monetary value attached to it and can be broken down in these two ways: a liquid asset and an illiquid asset. A liquid asset is cash that you have whether it’s in a savings account or any other money market account. An illiquid asset is stuff that you have that cannot be turned into immediately like a car or property.
What is a Liability?
A liability is anything that you owe which is any debt or payments that you have that are outstanding. It could be any financial obligation you have to meet.
How to Calculate Your Net Worth
Now that you have an understanding of the basic terms, let’s get into the meat of the matter and start to calculate your net worth. Here are the steps to follow:
List and Add up all your Assets
Take a stock of the monetary value of all your assets. Listing them first is a great way to ensure you capture everything and it gives you a good picture of your total asset base. Assets can include:
- Cash: cash in your savings and checking accounts
- Real Estate: home equity, value of your property etc.
- Motor vehicles: car, truck etc.
- Retirement Accounts
- Valuable items you may have in your home: art, jewelry, kitchen equipment, antiques etc.
List and Add up all your debts
In this step, you will need to list all your debts or any financial obligation you have at the current moment. They include:
- Credit card debts
- Student Loans
- Mortgage amount
- Auto loans
- Payday loans
Subtract your Assets from your Liabilities
After calculating all your assets and all your liabilities, you now have a dollar value attached to both. In this step, subtract the amount of your total liabilities from the amount of your total assets and there your have it – you have now calculated your Net Worth!
Positive and Negative Net Worth: what’s the difference?
When you calculate your net worth and you see a positive number – this means that you have a positive net worth which indicates that you have built an asset base that is stronger than your total liabilities. If the positive number is very small, there could be opportunities to grow your net worth even more by increasing your assets through investing in asset building activities like increasing your savings or investing.
If you see a negative number, this means that you have a negative net worth. Now this is VERY important: do not fret or feel despair. What this indicates is that you have more liabilities than assets which gives you an opportunity to evaluate your total financial position. Do you need to make some changes in your financial life? Perhaps you need to address your debt situation and maybe you are spending more than your income. The beauty of doing this exercise comes from the fact that you absolutely know where you stand and you can start to do something about it and get into action. Remember, even a small action can go a long way. It only begins with a start.
Net Worth Calculation Examples
Let’s go through some examples of calculating your net worth:
Sarah is 34, she owns a home valued at $250,000 and owes $175,000 on her mortgage. She has a car loan that she owes $15,000 on and $30,000 in her retirement account. She has $10,000 in her savings account and art collection that she inherited which is valued at $10,000. She has $7000 on her credit cards.
Assets
- Home: $250,000
- Art collection: $10,000
- Savings: $10,000
- Retirement: $30,000
- Total: $300,000
Liabilities
- Mortgage: $175,000
- Car Loan: $15,000
- Credit card debt: $7,000
- Total: $197,000
Sarah’s Net worth: $300,000-$197,000 = $103,000
Additionally, let’s look at Liam’s situation. Liam is 29 years old. He is currently renting and is paying $21,000 on a car loan. He has an investment account of $45,000 and is paying back a student loan of $37,000. He also has $5000 in his savings account. He has no credit card debt.
Assets
- Investment account: $45,000
- Savings: $5,000
- Total: $50,000
Liabilities
- Student loan: $37,000
- Car Loan: $21,000
- Total: $58,000
Liam’s Net Worth: $50,000-$58,000 = -$8000
Why Knowing Your Net Worth is Important
Knowing your net worth is very important because it gives you an accurate picture of your finances and can be a sobering exercise. You will get to see how your total financial life is adding up – if you simply are carrying lots of debt with little to no assets or vice versa. It can also allow you to see why owning assets are critical. In the cases above, even though Sarah has debt, her home equity is her most valuable asset which improved her net worth.
In order to really make big changes in your finances, do this exercise first. We recommend that you do this calculation every month, quarter and year. As you make moves in your money life, you will get to see how your net worth is moving along with it. Make it a priority and as you grow in financial abundance, you will see how much you have accomplished.
Conclusion
Knowing how to to calculate your net worth is a great step in your financial journey and gives you a good picture of your money. You can complete this step on paper or even in an excel spreadsheet. You can also find net worth calculators that you can plug in your information in and it spits out a number. Our favorites are: Bank Rate, Nerd Wallet and Sunlife.
Thank you for reading and let us know in the comments how you found the net worth calculation exercise!
xoxo
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