In the simplest terms, your net worth is your economic position. The calculation is straight forward as well, you take your assets minus your liabilities to come up with a number. This number is your net worth. So how do you calculate net worth?
Calculate Net Worth – Step 1
The first step in calculating net worth is to gather up all of your assets. Personally, I break up my assets into four categories:
- Cash: checking and savings accounts; CD’s; money under my mattress; etc.
- Investments: stocks; bonds; mutual funds; etc.
- Retirement: IRA’s; 401(k), etc.
- Property: cars; jewelry; household items; house; etc.
Everything on this list is fairly straight forward. When reporting property, be sure to use the market value and not the price you paid for it. If your house is worth $30,000 and you bought it for $30,000, list $25,000. Also, do not take into account any loans here. Simply enter the value of the item if you were to sell it today. (To make a quick and easy calculation for this step, use my net worth calculator.)
Calculate Net Worth – Step 2
The next step in calculating your net worth is to gather up all of your liabilities. Here you will list all of your debts: car loans, mortgages, student loans, credit card debt, etc. I tend to lump all of these into just liabilities. If you wanted, you could break them out into two categories, loans and credit cards.
Calculate Net Worth – Step 3
Once you have both your assets and liabilities listed, you just subtract assets from liabilities to get your net worth. For example, if you have $100,000 in assets and $50,000 in liabilities, then your net worth would be $50,000.
Calculate Net Worth – FAQs
Can I have a negative net worth?
It is entirely possible (and not uncommon) to have a negative net worth. Typically a negative net worth is associated with younger people since they tend to not have a lot of assets. You can also have a negative net worth if your house is underwater. Ideally however, you do not what to have a negative net worth.
Why is a negative net worth bad?
A negative net worth is bad because it essentially means that if you took everything you owned sold it and paid all of your debt, you would still owe money. You are basically living beyond your means. You need to get into the habit of saving money and building your assets and getting rid of your debt.
What should my net worth be for my age?
Financial Samurai put together an amazing (that doesn’t even do it justice) post on The Average Net Worth for The Above Average Person. This should be your guide to determining where you should be in terms of net worth.
How should I calculate net worth? Excel?
There are three ways you can calculate net worth:
- Paper/Pen: this is the “old school” method. I enjoy this one the most until I found Personal Capital
- Excel: I created a free net worth template for you to use. Just enter in the amounts and let it take care of the math.
- Online: Personal Capital is the gold standard for this. I highly recommend it.
Should I include personal property?
There are a few schools of thought on this one. On the one hand, it makes sense to include it since it is a factor in what you are worth. The problem arises when you overestimate the value. It isn’t worth what you bought it for, it’s worth what you could sell it for. The best way to handle it (and most accurate in my opinion) is to include it, but every year decrease the values by 3%, which assumes the inflation rate.
What about my house? Should I include it?
Personally, I don’t include my house. The reason is because I view my net worth as what I would have left if I sold everything I owned. I wouldn’t plan on selling my house since I would keep it as shelter. Including or not including your primary residence is not right or wrong, it is just personal preference. I’ve always excluded my house and foresee that I always will.
How often should I calculate my net worth?
At the very least, you should calculate it on an annual basis, the same time each year. For many, that would be year-end. Ideally, you should calculate net worth quarterly. Personally, I calculate net worth monthly. I started doing this in college and enjoy sitting down at month end, making sure all of my accounts are balanced and nothing fishy is going on. Since I have everything updated right then, I can quickly perform my calculation. Again, you don’t have to calculate net worth that frequently. Find what works for you.
It’s important to calculate net worth on a regular basis. Doing so helps you to see whether or not you are increasing your assets as you age, allowing you for a secure future and retirement. It can be a warning signal if you are spending too much as well. Personally, I make a game out of it and work hard to consistently increase my net worth. The goal is to increase it each month, however, market fluctuations don’t allow for this because this is such a short time frame. If you calculate net worth monthly, focus more on the annual number and try to increase that each year.
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