Being a business school graduate seriously makes me love to see money working and the numbers behind it. I find that seeing calculations can really help a person understand their overall financial situation and really start making better decisions about their finances. What’s my favourite number to calculate for personal finance? Net worth!
Your net worth can help you see a snapshot of your finances at a given stage and it’s a great way to see if you’re making progress towards a better future. It’s the number one tool I suggest when tracking wealth building.
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So, what is net worth anyway?
Net worth in it’s most basic form is all of your assets minus your liabilities. Sounds pretty simple right?
Wait, what are assets and liabilities? I know there’s a chance you haven’t taken an accounting class in your life and you may have never heard these words before reading them now. So let’s discuss assets and liabilities!
Your assets include anything that you own that has any monetary value, this can include:
- Home Equity
- Car Equity
- Retirement Savings
- Savings Accounts
- Chequing Accounts
- Furniture that holds value
- Boats/Motorcycles, etc.
Your liabilities include anything that you owe money toward, this could include:
- Car Loan
- Student Loans
- Credit Card
- Lines of Credit
Why calculate net worth?
Your net worth is a financial health snapshot. It can show you exactly how much you owe and how much you have at any given time which can really help you see where you can improve.
It really helps you to see that putting a big purchase on a credit card will decrease your net worth, but paying off debt will increase your net worth! Anytime you make a purchase that won’t increase in resale value your net worth will decrease, so if you go shopping for a new pair of $200 boots, your NW will go down $200.
How do I calculate my net worth?
Step One: List all Assets
Something thing to remember when listing your assets is depreciation. What is depreciation? Well, when you buy a brand new car for $20,000, it loses value every minute you own it. That’s depreciation. When you’re calculating the value of your car, you’ll want to put the amount it’s worth today, not what you paid for it. If you need to look up the value of your car today check out Kelley Blue Book.
Another factor to consider is the amount of equity you have in some items. If you have a mortgage on a home that’s worth $250,000 but you still owe $145,500 on the house, you’d only consider the $104,500 that you actually have as equity in your house. Your mortgage amount would be considered a liability, not an asset. It works the same way for your cars.
So, let’s look at an example of assets for a net worth statement.
After the assets have been listed, we want to add them all together to calculate our total assets.
Step Two: List all Liabilities
Listing our total liabilities isn’t nearly as fun as listing our assets. It’s never fun to find out how much money we owe people. It’s nice to see how much we owe because it shows us that we’re making progress every time we make a payment.
Let’s check out an example of liabilities for a net worth calculation.
After we make a list of all our liabilities, we can add them together and find out total liabilities!
Step 3: Subtract your Liabilities from your Assets
The final step in calculating your net worth is to do the actual calculation (duh!). Now we’re going to subtract our liabilities from step two, from our assets in step 1.
Why is the number negative?
A negative net worth may sound crappy, but it’s possible. There is always a chance your net worth can be negative. This just means that you have more liabilities out there than assets which is perfectly okay. Lots of people out there have a negative net worth.
The only way to increase your net worth is to either increase your assets or decrease your liabilities. To start, I recommend working hard to decrease your liabilities. All of your liabilities are just debt, once you’re able to clear out your debt, your net worth will skyrocket. Can you imagine how different our calculations would be if the example had a paid off mortgage? Or no student loans? Focus on making small steps to improve your net worth!
If you start calculating your net worth once a year you can really see how much progress you’re making. If you want to really focus your efforts on increasing your net worth, you should really be keeping a close eye on your budget. The best possible way to work through a budget is to use the zero-based budgeting method that I’ll always recommend to my readers because it’s easy to use.
Just like your personal health journey, your financial health only gets better if you work on it every single day. Have you ever tracked your net worth? Let me know in the comments.