Net worth is an essential indicator of your overall financial wellbeing. Although it is not the only number to consider as you build a foundation of financial stability, your net worth can present a snapshot of your finances in real-time. Today we will take a closer look at what your net worth is, why it matters, and how to calculate net worth.
What is net worth?
Your net worth is the sum of your assets minus your liabilities. Essentially, the number captures how much is owned against how much is owed. The net worth number can be used to evaluate the current financial standing of an individual or company.
In general, a higher net worth is more favorable. Although you may make strategic decisions along the way that could lower your net worth, the end goal is to increase this number. For example, you might choose to take out a loan to purchase an income-producing property. That decision may have the immediate effect of lowering your net worth. But it may have a long-term effect of raising your net worth in the future as you pay off the loan and enjoy the revenue from the property.
What does net worth mean?
When you look at your net worth, you are given a snapshot in time of your financial picture. The number cannot act as a predictor for your future financial picture. But it can tell you exactly where you stand at the moment.
How to calculator net worth
Now that you know a little bit more about your net worth, it is time to learn how to calculate it!
What to include as assets
In terms of assets, you can include anything that you own that can be assigned a monetary value. A few examples of assets include any property that you own outright, paid off vehicles and investment portfolio balances.
It is important to note that you can include any portion of the assets that you own in your net worth. For example, let’s say you have a $50,000 mortgage balance on a home, but it is worth $100,000. Then you can include $50,000 of equity in your assets and $50,000 as a part of your liabilities.
What to include as liabilities
On the flip side, liabilities are any outstanding financial obligation in your life. A few examples include the balance on your mortgage, credit card balances and auto loans. As you think through your liabilities, you should essentially be looking for any outstanding loan balances.
Example net worth calculation
Let’s take a look at an example net worth calculation.
Let’s say you have the following financial statements in your personal finances:
- A taxable investment account with a market value of $150,000.
- A car with an auto loan with a current outstanding balance of $20,000.
- Student loans totaling $15,000.
- A checking account with a balance of $2,000.
- A savings account with a balance of $5,000.
- A home valued at $100,000 with an outstanding mortgage balance of $75,000.
First, let’s add up the assets which include the taxable investment account, checking account balance, savings account balance, and home equity. That leads to a total of $182,000 in assets.
Next, it is time to add up the liabilities which include the auto loan, student loans, and mortgage balance. That leads to a total of $110,000 in liabilities.
Finally, you can subtract the liabilities from the assets to find your total net worth. In this case, the total net worth would be $72,000. Although your unique financial picture will look different from this example, it gives you a better idea of how to calculate your net worth.
Why net worth matters
It is important to understand your net worth because it is a simple number to track over time. If you are pursuing financial independence, then you may set a net worth goal to align with your FIRE plans.
The best part about your net worth is that it shows your financial progress in an objective way. You can use this number as a guiding light to make progress towards your long term financial wellbeing.
For example, many start out their adult lives with a negative net worth. With that knowledge, they can make decisions to pull themselves into the black. Without a clear picture of where you stand, it can be difficult to stay on track to reach your financial goals.
How often should you calculate your net worth
The power of your net worth is that it can help to track your progress towards your financial goals. But how often should you check this calculation? The answer depends on your tendencies.
Some may only want to check this number once or twice each year. Others may want a daily or weekly update. There is no right or wrong answer to the number of times that you can calculate your net worth. But don’t let this number take over your life. If you find yourself obsessing over your net worth, then you might be taking it too far. Instead, check-in on a regular basis to make sure you are on track without adding extra stress to your life.
If constantly calculating your net worth seems like an inconvenience, consider working with a service like Personal Capital to access your current net worth at any time.
The bottom line
Your net worth can be a powerful number to help you track your progress towards financial independence. As you build your financial foundation, it is a key number that can help guide your decisions. Take a few minutes to calculate your net worth today!