It’s easy to get caught up in discussions about saving money or making more of it. After all, those things will help us reach whatever financial goals we have. However, beyond that, it’s important to be aware of the state of your finances. A budget is a good way to help you keep track of your expenses, but I mean in a more general sense. What are you doing to actually maintain a snap shot of your finances so you know what you’re working with – whether that’s currently good or bad? That’s where your net worth comes in. It’s not foolproof, or the only metric that matters, but it’s a great one for you to have at your disposal.
What Is A Person’s Net Worth?
An individual’s net worth is a great indicator of their financial health. It’s a way to see their current “value” as it strictly relates to money. In other words, it takes everything you own and sums it all up, subtracting any debt you may have as well. This includes your savings accounts, investments, properties, and just about anything else you can think of. If you’ve struggled with the concept in the past, don’t overcomplicate it for yourself. It’s just a way of putting a value to your total belongings. It’s an arguably abstract concept, but overall it’s straightforward.
What’s The Math Behind It?
The math behind calculating your net worth is just basic arithmetic! Like I said, net worth is straightforward – it’s certainly not rocket science. In order to figure out your total net worth you simply need to find the sum of all of your assets, the things you own, and the sum of all of your liabilities, or things you owe. Once you’ve figured those two things out, you subtract your liabilities from your assets. Whatever you’re left with is what your net worth equals.
Net Worth = Assets – Liabilities
How Do I Calculate That?
So, the math behind calculating your net worth is certainly easy. What can make it complicated is how you have to figure out your total assets and liabilities. For some people this can get incredibly complex fast. If you have complicated finances, sitting down and figuring this out can take some time. If you’re reading this article, I assume your finances are relatively simple, and that’s what I’ll explain below. For those who have complicated finances and have never done this, it may be wise to seek the assistance of someone who has done it before (such as a financial advisor).
Assets
First, you need to make a list of everything you own. Well, at least make a list of everything you own that has significant monetary value. This can include expensive jewelry, precious metals, cash, investments in the stock market, retirement accounts, your home, and whatever bank accounts you may have. Once you have that list, figure out how much each item is worth. If your house is worth $500,000, then list $500,000 as an asset. If you have $5,000 in one of your bank accounts, then add that to your assets as well. Once you have listed everything and added it all up, you’ll have the total value of all of your assets.
If this number seems high, don’t get excited yet. The value of your assets can actually be much higher than your total net worth. That’s why it’s important to factor in your liabilities.
Liabilities
This process is quite similar to what I just laid out with your assets, but it should (hopefully) be a more concise list. You need to find everything you owe, whether it relates to an asset or not. For example, your list should include your student loans, credit card debt, and home loan. So, if you owe $300,000 on your house, include that in your liabilities. If you have $60,000 in student debt, be sure to include that as well. Once you’ve added all of it up, you’ll have the total for your liabilities.
Putting It All Together
This is the important part that makes all the pieces fit. Now that you have values for your assets and liabilities, you can just plug them into the simple equation above. Doing that will give you your net worth. Let’s go over an example.
For simplicity’s sake, let’s say your only asset is a $500,000 home. You have no money in the bank, and nothing else to your name (again, to keep this simple). Let’s also assume that you owe exactly $300,000 on the house. If we plug those values into the equation, Net Worth = Assets – Liabilities, we’ll find out the net worth in this case. So, when we subtract $300,000 from $500,000, we are left with $200,000. Therefore, in this example, you’d have a net worth of $200,000.
Obviously the math will take a little longer for most people, but that should help explain how this is calculated and why it is a good tool for getting a nice snapshot of your current financial state.
Extra Tips For Calculating Net Worth
- Keep good records when it comes to financial documents
- Store your financial documents in one location, preferably a secure lockbox
- If possible, recording the value of your major assets in a document or spreadsheet can make it easier to stay up to speed with your net worth. It keeps it all in one place, so you only have one place to go to when updates are needed
- Personal Capital contains many free financial tools, one of which is a net worth calculator. All you have to do is link up your accounts, and it does all the monitoring and math for you
How Does Knowing My Net Worth Help Me?
As I’ve said, your net worth gives you a great snapshot of the state of your finances. It can help you figure out what you’re dealing with, identify areas where you’re strong, and bring to light any issues you might need to work on. On top of that, it can help you keep track of how you’re lining up with your financial goals. If you’re nowhere near an important milestone, knowing your net worth can often give you enough information to make good decisions about how to proceed. For more information on setting and reaching your financial goals, check out my article on it here.
How Can I Increase My Net Worth?
Overall, increasing your net worth is a straightforward and simple process. However, it’s one that is definitely easier said than done at times. Remember to stay disciplined and on track, even when it’s easy to get discouraged. If you want to increase your net worth, especially by a significant amount, the ability to stick to your goals will help you tremendously.
Get More Assets
One thing you can do is obtain more assets. Obviously this includes making a living and keeping some money in the bank, for an emergency fund. That is great, and can help you build, but expenses can eat a huge chunk of what you make if you don’t have a good budget. Even with a good budget, you’re limited by your income. You can increase that with a lucrative side hustle, and put your money towards purchasing strong assets, like ETFs or real estate, that will make money for you. If you want to learn how to start investing now, check out my guide.
Get Rid Of Liabilities
The other option is to reduce your liabilities. In other words, focus on getting rid of your debt. I love the debt snowball and avalanche methods for eliminating debt. If you have loans with a high interest rate, focusing on them before investing can be a great idea – in a way it is a guaranteed return. Be thoughtful of how you manage your liabilities though. If your only liability is your home, it may not be worthwhile to pay off that loan early if it has a low interest rate. Ultimately you’ll need to make the decision if getting more assets or reducing liabilities will net you the best result (it’s a corny joke, but I’m sticking by it unapologetically).
A great example of a huge liability is your car. If you buy used, you may be able to save a lot of money. Think twice before buying a new car, especially if you have to go into debt to do it.
Conclusion
Hopefully this article was illuminating for you about how to figure out your net worth and make decisions based on it. If you have any tips or thoughts of your own, be sure to leave a comment. If you want to see more content like this, be sure to sign up for the Bitter to Richer newsletter to stay up to date on all of it.
