What’s Your Net Worth?
Do you know what you’re worth? (We’re only talking money — we’d never try to calculate your true worth!) If you don’t, there’s an easy way to find out: calculating your net worth.
What is net worth?
Simply put, net worth is what you own (assets) minus what you owe (liabilities). Assets include cash, investments, real estate and other properties, vehicles, retirement savings, and valuables that have significant worth. Liabilities include mortgages, personal loans, student loans, credit card debt, car payments, or any other debt you might have.
Why is it important?
According to Investopedia, “Calculating your net worth helps you figure out where you are financially at this point in time.” If you have any financial goals at all, you should know what your current financial state is. When you make financial decisions, you should always have the goal of increasing your net worth — and you can’t do that if you don’t know what it is. Knowing your net worth year on year will give you a clear picture of how your finances are improving (or decaying). Calculating your net worth will show you your financial health and your financial progress.
Also, by taking the time to find out your net worth, you can pinpoint problem areas more easily. Maybe your liabilities are growing and it’s affecting your net worth negatively. Or maybe your assets are decreasing and you need to find a way to get your net worth back up. Once you see the problem areas, you can address them and get your net worth trending positively again. But you can’t get started until you know what your net worth is.
How do you calculate it?
You don’t need any fancy programs to find out your net worth (though you can easily find handy Excel templates online, like this elegant-looking one). All you need to do is:
- List all your assets. Tally up your savings accounts (including any retirement savings), checking accounts, cash, investments, real estate, the value of your vehicles and other high-ticket items (though we recommend you don’t include anything that costs less than your car), and other assets you may have. Be careful not to overestimate the value of things like real estate and vehicles, because you won’t get an accurate picture of your finances if you do.
- List all your debts. Tally up your auto loans, personal loans, mortgages, home loans, and any other debts you have.
- Subtract 2 from 1. If the difference is positive, congratulations — you’re on the right track. If it’s negative, read on to find out how you can improve your net worth.
So what’s your net worth?
What if it’s negative — how can you raise your net worth?
Fresh college grads, or people otherwise just starting out in the real world, will probably have a low or negative net worth just because they haven’t had the chance to build on their assets yet. If this sounds like you, then there’s no need to worry too much about it. You have time to earn money and increase your net worth. As you spend more time working and earning money, your net worth should be going up every year.
But sometimes, a negative net worth can be due to too many debts. Maybe you’ve got a lot of credit card debts and you don’t have enough assets to balance it out. In this case, you should make it your goal to decrease your credit card debt to get your net worth trending positively again. Check out several strategies on how to defeat credit card debt.
You can also take a look at your assets and see if they’re working as hard for you as they can be. If your savings are languishing in low-interest accounts, find a high-yield account that will give you more bang for your buck. Or consider going into investing — check out tip #3 in this article.
How often should you check it?
Once a year should be enough to take into account the fluctuations in value of your assets and liabilities. You can add it to your annual financial checkup to help you form your financial plans for the new year.
Some people might find it helpful to check their net worth monthly, because it motivates them to keep working towards their goals. “It can act as a nudge,” says financial planner Linda Leitz in an interview with Time magazine. If you see your net worth going down, it can get you to focus on reducing debt. If you see it going up, it can motivate you to keep up good money habits, and to make smart decisions with your money.
No matter your financial situation, knowing your net worth is a step in the right direction for your financial future.