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Being fiscally responsible often means coming to terms with a variety of factors, both internal and external, that contribute to an individual’s total financial health. When analyzing finances, one will often look to specific numbers and calculations; adding up debt, looking at income, and checking in on their credit score from time to time. However, each action only offers a glimpse of the total picture.
A better way to gain insight into your comprehensive financial health is to calculate your net worth. Though that might seem daunting – and for some of us, frightening – it’s a key calculation that can help you make better decisions and create a roadmap toward a healthy financial future.
On this page:
What is Net Worth?
Your net worth is a number that reconciles all your assets (cash, real estate, automobiles, investments, etc.), and your liabilities or debt (mortgage, loans, student debt, etc.).
Once you determine your net worth, you’ll have more insight into your current financial health, but the true benefit comes from what you do with that knowledge. Understanding your net worth is essential in making educated decisions about your financial future.
Knowing your net worth may help you identify and reign in impractical or irresponsible spending. It could also help you reevaluate how to pay down existing debt and ultimately plan for future investments, including purchasing a home or planning for retirement.
How to Calculate Net Worth
Calculating your net worth is simple, and once you gather all the required information, it can be done relatively quickly.
Step 1: Identify, Quantify, and Add Up All Your Assets
Your assets are the things of value you own. This includes any funds in a checking or savings account, current investments, your home, car, etc. Keep in mind the value of some assets will be obvious and easy to obtain. For example, your bank account balance is typically only a few clicks and a password away.
However, some may be more complicated and will require legwork on your behalf. This is particularly true for items that may have depreciated in value since you purchased them, like automobiles and boats. This is also true for assets that might have increased in value, like a home value after improvements or upgrades.
Step 2: Identify and Add up Liabilities
To do this, simply list all debts you currently have, including your mortgage, auto loans, personal loans, etc. Add them up and the final number will represent your total liability.
Step 3: Subtract Your Total Liabilities From Your Total Assets
The following formula can be used to determine your net worth:
[Sum of all Assets] – [Sum of all liabilities] = Net Worth
For example, if the sum of your total assets is $150,000 and your total liabilities are $45,000, then your net worth would be $105,000.
Negative vs. Positive Net Worth
After you’ve completed step three, you may find you have a positive net worth, and if so, congratulations! However, if the exercise above left you with a negative net worth and a ton of anxiety, take a deep breath.
A negative net worth is common among those just starting out or even well into their financial adulthood. Student loan debt, mortgages, car payments, etc., are normal. For people who make responsible financial decisions (hopefully a byproduct of determining their net worth), their debt will typically dissipate over time.
As such, a positive net worth is something many of us must work toward through the years. Of course, a positive net worth doesn’t necessarily mean you’re on easy street or that you can continue spending as you have.
A mortgage liability, when paid down, will typically result in a positive asset (i.e., you own your home). Credit card or personal loan debt, on the other hand, does not produce the same long-term value and can prevent you from making progress toward obtaining real assets.
Tracking Your Net Worth
Once you’ve established your net worth, it’s important to continue to track it. For that reason, it’s helpful if you keep an easily modifiable record (like an Excel spreadsheet) to determine and subsequently monitor your net worth.
Looking for a more hands-off approach to net worth monitoring? You’re in luck. There are several automated programs and apps that can do that for you. Most of these apps will require you to link your financial accounts (bank accounts, investment accounts, etc.) so they can provide up-to-date overviews of your net worth at any given time. Here are a few of the most popular ones:
- Personal Capital
- YNAB (You Need a Budget)
Coming to terms with your net worth might seem like a daunting task, but it’s fairly easy to do and can unlock the information you need to make the best decisions for your financial future. Once you determine that initial magic number, be sure to continue to monitor it. And, if you find yourself with a negative net worth, don’t panic — it’s not uncommon. As you pay down debts, you’ll see yourself inch closer to a positive net worth and a healthier financial future.