What is Net Worth?
Your net worth can be an extremely useful tool in measuring your economic status and overall financial progress from year to year. Your net worth is essentially a grand total of all your assets minus your liabilities. In other words, your net worth is the figure you get when you add up everything you own from the value of your home to the cash in your bank account and then subtract from that the value of all of your debts which may include a mortgage, car or student loans, or even credit card balances.
The Theory Behind Calculating Net Worth
Theoretically, your net worth is the value in cash you would have if you were to sell everything you own and paid off all of your debts. In some cases, this number is actually negative, which indicates that you own more in liabilities than in assets. While this is not an ideal situation, it is very common for people just out of the university or starting their careers.
In that case, your net worth is also a measure of how much debt you would still owe if you emptied your bank accounts and sold everything you own to put towards your debt. Though neither is a realistic scenario, what your net worth measures is more important than the (generally unrealistic) assumptions that are made to get to that number.
In fact, when it comes to your financial health, so to speak, there is no ubiquitous magic net worth number you should be striving for, but you should use your net worth to track your progress from year to year and to hopefully see it improve and grow.
How to Calculate Your Net Worth
Calculating your net worth can be a simple process, but it requires that you gather all the information surrounding your current assets and liabilities.
Most financial planners recommend that their clients keep a secure folder with information on all financial assets and liabilities to be updated at least once a year. Gathering and organizing this information can be a bit of a chore at first, but ensures that you (and anyone else who might need it like your spouse or financial advisor) have access to the information when needed.
Though such a folder can be turned into much more, calculating your net worth only requires basic financial information regarding the things you own and the debt that you owe. Here’s how to get started:
Calculate Your Assets
- Start by listing your largest assets. For most people, this could include the value of their home, any real estate properties, or vehicles like personal cars or boats. In the case of a business owner, this list would also include the value of their business, which has its own more complicated calculation. Make sure you use accurate estimates of market values in current dollars.
- Next, you’ll want to gather your latest statements for your more liquid assets. These assets include checking and savings accounts, cash, CDs or other investments such as brokerage accounts or retirement accounts.
- Finally, consider listing other personal itemsthat may be of value. These could include valuable jewelry, coin collections, musical instruments, etc. You don’t need to itemize everything, but you can try to list items that are worth N50,000 or more.
- Now, take all of the assets you have listed in the first three steps and add them together. This number represents your total assets.
Calculate Your Liabilities
- Again, start with themajor outstanding liabilities such as the balance on your mortgage or car loans. List these loans and their most current balances.
- Next, list all of your personal liabilitiessuch as any balance on your credit cards, student loans, or any other debt you may owe.
- Now, add up the balances on all of the liabilities you listed above. This number represents your total liabilities.
Calculate Your Net Worth
- To calculate your net worth, simply subtract the total liabilities from the total assets. For this exercise, it doesn’t matter how big or how small the number. It doesn’t necessarily matter if the number is negative. Your net worth is just a starting point to have something to compare against in the future.
- Repeat this process once a year and compare it with the previous year’s number. By comparing the two, you can then determine if you are making progress or getting further behind on your goals.
More Net Worth Tips:
Be conservative with estimates, especially with home and vehicle values. Inflating the value of large assets may look good on paper, but may not paint an accurate picture of your net worth.