Your net worth calculation can help you measure your financial well-being. By knowing what your net worth is right now and then tracking it over time you can measure the progress you make as you build wealth. It is important to understand what goes into your net worth so you can understand why it goes up or down over time.
Calculating your net worth will help you see what progress you are making in saving, investing and growing your money while at the same time reducing and eliminating your debts.
Your net worth is basically your assets minus your liabilities. To get started with your net worth calculation you will have to look at your entire financial picture and round up everything that makes up your assets and liabilities.
Net Worth Calculation: Your Assets
An asset is basically something that has value to it, more specifically something that has a monetary worth to it.
Where I am going to add my two cents is that it should be something that has the potential to maintain or increases it’s value. This is why I do not recommend including the value of personal property as part of your assets. Why?...
Because, for example, that shiny, new 50 inch TV you just bought is worth less today than it was the day you bought it and as time goes by it will be worth even less.
On the other hand if you own, let’s say, a house, then that is an asset whose value has the potential to go up. Yes, it might go down too but you can probably sell it for more than what you paid for it, especially if it has had time to appreciate (hopefully).
Whether or not you want to include in your assets personal property is up to you but I don’t recommend it since you could be fooling yourself to believe that something is an asset when it’s not.
What to include in your assets:
Net Worth Calculation: Liabilities
For calculating net worth a liability is defined as an obligation to pay, a debt or just plainly money that you owe to someone. There can be numerous liabilities but at least consider the following:
- Mortgage – include how much you owe on your mortgage, not your monthly payments.
- Credit card debt – round up all your card statements and total up how much you need to pay them off completely.
- Car loans – same thing.
- Student loans
- Taxes owed to IRS or State
- Any liens/judgments against you
- Lines of credit that you owe on
- Personal loans from family/friends
- Child support – you might have to figure out how much more you have left to pay until it stops and include that whole amount as a liability.
Once you have rounded up your assets and liabilities and have a realisitic dollar value to all of them it’s time to add them up…
Doing your net worth calculation is pretty straightforward, just deduct the total amount of your liabilities from the total amount of your assets. You can do it on paper, on a spreadsheet or use one of these simple calculators you find online here and here.
You can see this example of a personal net worth statement.
Once you go through this exercise the first time it becomes easier to do the next time. I recommend you do this at least quarterly so that you see how you are making progress and keep focused on increasing your net worth.
When you do this net worth calculation over time then you can start comparing changes. Ask yourself why it goes up or down, how have your liabilities decreased, how have the assets increased? And most importantly, what do you need to do to keep on increasing your net worth?...
If you like this article please share it:
…thanks, my friends.