How to Calculate Your Net Worth!
What is Net Worth?
In it’s most basic form your net worth is your assets – your liabilities! Sounds pretty simple right?
assets – liabilities = net worth
Your assets include anything that you own that has any monetary value. Examples of your personal assets can include your house, your car, investments, retirement, cash, etc.
Your liabilities include anything that you owe money toward. This can include your mortgage, your car loan, student loans, credit card debt, lines of credit, etc.
Why is it Important?
Knowing and understanding your net worth can help you make better decisions with your money long term. If you calculate your personal net worth once a year you can see what kind of progress you’re making in personal finance.
Knowing your net worth can help you reach retirement earlier because you’ll know exactly how much money you have in all accounts and how to compares to how much you owe!
How to Calculate Net Worth?
The first step to calculating your net worth is listing all your assets and liabilities! When you write down all your assets you need to be sure that you’re recording the amounts at the resale value, not at the purchase price. Why is this important? Depreciation is a real pain! If you purchase a car for $20,000 in 5 years it will probably be worth less than half of that. You don’t want to calculate your net worth on numbers that aren’t true.
If you have a car and you want to figure out the current market value for your car during a private sale (not a trade in because car companies are mean and won’t give you the full value haha) check out Kelley Blue Book!
In order to properly calculate your net worth, you have to differentiate between your debt and equity. Just because you own a home that’s worth $250,000 doesn’t mean you get to put all of that in your assets if you have a mortgage. So let’s say you have a 250K home but the amount you still owe on your mortgage is $112,000. This means that the $112K counts toward your liabilities and the $138K goes toward your assets! The same goes for your car!
So let’s list all of your assets. What gets to be added to this section?
Next, we’ll list all of your liabilities. What gets to be added to this section?
LINE OF CREDIT
Now you can add the two sections separately and subtract your liabilities from your assets, and that’s your net worth. If your net worth is over $1,000,000, then congrats! You’re a millionaire!
An Example of Net Worth Calculation
There is a chance that you’ll end up with a negative net worth. This may scare you but it’s okay. Lots of people have a negative net worth. This just means you have a lot of debt. What you need to do is establish a budget and pay down your debt to increase your net worth. Want to start a budget? Check out our post on the Zero-Based Budget. Your net worth is an easy calculation of your financial health and gives you a snapchat of your wealth at a particular time!
Check it once a year and see if you are making progress. Once you pay down all your debt you’ll be increasing this number every single day.
Thanks so much for reading!