Do you ever wonder how well you are doing financially? Do you wish there was an easy way to see your finances without having to go through the work of building and following a budget?
Well I have good news for you!
You can calculate net worth to get a clear picture of your finances. Doing so takes only a few minutes and over time, shows you if you are improving your finances, making them worse, or just treading water.
As you will see below, calculating your net worth can change your money habits for the positive and help you to reach your financial goals.
So if you finally want to take control of your money, learn how to calculate net worth below and start seeing changes right away!
What Is Net Worth?
In the simplest terms, your net worth is your financial position. The calculation is straight forward as you take your assets, the value of everything you own, and subtract your liabilities, the value of everything you owe to others, to come up with a number.
The number you end up with is your net worth.
So how do you calculate net worth?
Calculate Net Worth In 3 Simple Steps
Step 1: Calculate Your Assets
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, ETFs, etc.
- Retirement: IRA’s, 401k, 403b, 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 car is worth $15,000 and you bought it for $30,000 list $15,000 as its value.
The same idea applies for your house. List what it is currently valued at, not what you bought it for, and ignore your mortgage balance for now.
Do not take into account any loans here. If you owe $5,000 on the car, you ignore that for this step. Simply enter the value of the item if you were to sell it today. We will tackle the loan in the next step.
Step 2: Calculate Your Liabilities
The next step in calculating your net worth is to gather up all of your liabilities. Here you will list all of your debts. This includes car loans, mortgages, student loans, credit card debt, etc.
I tend to lump all of these into just liabilities and not break them out into categories like I showed you for your assets above. If you want to create categories for your liabilities, you could use the following:
- Credit Cards: list all of your credit card debt
- Loans: list all of your loans like mortgage, car loan, mortgage, etc.
You would put all of your credit card balances under the credit card category and any loans you have under the loans category.
To be clear, just list the balances you owe in this section. Look at your most recent statement and record whatever the balance you owe for each.
Step 3: Adding It All Up
Once you have both your assets and liabilities listed, you have to total up each section. Look at your assets and add all of them up and write down the total. Now do the same for your liabilities.
Once you have the totals for each, simply subtract liabilities from assets 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.
If you have $50,000 in assets and $100,000 in liabilities, then you have a net worth of negative $50,000.
How To Calculate Net Worth – FAQs
That is all there is to the calculation of net worth. It’s very basic, but there are some questions you might have about it. Below I list some of the more common questions I hear regarding calculating net worth.
Can I have a negative net worth?
It is entirely possible (and not uncommon) to have a negative net worth. 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 want to have a negative net worth.
As you age, your net worth should improve as you pay off your debt, make more money and save and invest.
But if you aren’t saving or investing regardless of your age, you could 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 own, sold it and paid all of your debt, you would still owe money. You are basically living beyond your means.
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.
While it might look overwhelming to get to these levels based on where you are today, it can be done. You just have to put in some effort to be smarter with your money.
How should I calculate net worth?
There are three ways you can calculate net worth:
- Paper/Pen: this is the “old school” method. You would break the sheet of paper into two columns and on the left list out your assets and on the right, list out your liabilities. Then you would total them up and at the bottom complete the final calculation, assets minus liabilities to get your net worth.
- 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 for you. Most of the categories are pre-filled for you. But if you find one is missing, you can replace an unused category with one you need or simply add a row.
- Online: Personal Capital is the gold standard for this. I highly recommend it. Just link up your accounts for free and it will crunch the numbers for you. Then in the future, whenever you want to see your net worth, just log in and Personal Capital will calculate it for you. There is nothing left to do on your end. You can learn more here.
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 is when you overestimate the value, which many people do.
Your belongings aren’t worth what you bought them for. They’re worth what you could sell them for.
The best way to handle personal property (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 for a place to live. Others might argue to include it as you can sell it and rent an apartment or buy a smaller house.
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.
Is it wrong if I ignore my personal property and house in my calculation?
Not at all. In fact, I calculate three different net worth statements all of the time. It wasn’t always like this. At first, I calculated net worth as I detailed today, where I included everything. But recently, I wanted to get a different perspective on my wealth. I wanted to see how much I was worth when I just took into account my savings and investments and subtracted out the money I am in debt.
The point of this for me is to see how I am progressing towards building my wealth. I do this by saving and investing, and not buying things which would increase my personal property.
I also perform a quick income to net worth ratio calculation. This helps me to see that I am saving money and am on the path the financial independence.
At the end of the day, you have to determine what you want to know about your finances and build your net worth statement based on that.
At this time, I would just encourage you to start calculating your net worth. In time, as you want other detailed information about your finances, you can make changes.
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.
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 net worth calculation. Again, you don’t have to calculate net worth that frequently. Find what works for you.
What are some things I can do to increase my net worth?
The key to increasing your net worth is understanding that there are two components of it: assets and liabilities. While you might think paying off debt won’t matter since you aren’t saving money, it does matter. You are reducing your liabilities and as a result, are increasing your net worth.
Plus, debt carries interest. So even if you aren’t adding to your debt, it is still slowly growing thanks to interest.
Here are a few things you can do to increase your net worth.
- Pay off your debt
- Figure out how to earn more money from your career
- Start a side hustle to earn extra money
- Invest everything you can
How Tracking My Net Worth Saves Me Money
While telling you why it is important to calculate your net worth, I figured it would be a good idea to show you how it can save you money. I’ll use myself as the example here, since I have a couple of stories to share about this.
As I mentioned above, I started to track my net worth back in college. That was 17 years ago. I have tracked it every month since then. Originally, I recorded it on a piece of paper and even created a chart on paper to graph it over time.
I still calculate net worth on paper, but I have since switched to Excel for the graph. I was getting tired of re-creating the graph as I kept running out of room on a standard sheet of paper!
So how does calculating net worth help me financially?
Motivation To Get Better #1: Wanting To Take Control
When I finished college, I had student loans and credit card debt. As a result, my net worth was negative to the tune of close to $25,000. I owed more than I owned. I started working two jobs, primarily to pay off my credit cards, but also focused on paying down my student loans as well as investing a little each month.
Every month, my negative net worth would get smaller and smaller.
After about a year, I hit the “holy grail”: I had a positive net worth.
Your Takeaway: Calculating my net worth motivated me to improve my finances. I wanted to see that ending number get to zero, and then become positive. At the end of each month, I would get excited to see it change for the better.
One more point you should take away from this is that I didn’t pay off all of my debt in that one year but my net worth became positive. How is this possible? I was investing money along with paying off debt.
By investing some of my money, it was growing on its own. While I invested $100 each month, at the end of the year, I had more than $1,200. It compounded and earned dividends so I ended up with more.
If you want to improve your finances, you have to look at investing. If you do it right, you can be successful.
Motivation To Get Better #2: Curbing The Urge To Spend
Around the time my net worth had turned positive, I started to notice some really nice new cars. Nothing was wrong with my current car. I just wanted a new one.
The ironic thing is if I wasn’t tracking my net worth, I would have bought the car. But I was tracking my net worth.
I looked at my positive net worth of $4,580 and realized that if I buy this $20,000 car, my net worth is going to be negative again. While this thought may not make most people think twice, it made me reconsider the purchase.
I looked back at how hard I worked over the past year to get to this point. I worked two jobs at close to 70 hours per week.
One of which was in retail during Christmas. How I didn’t end up with gray hair from that, I’ll never know.
I was essentially throwing all of that away for a car that I didn’t need, I wanted.
I ended up not buying the car and continued on the path of increasing my net worth.
Your Takeaway: By tracking my net worth, it made me question purchases that I otherwise wouldn’t question. If it weren’t for my net worth, I would have bought the car and who knows what else and still be paying the price. It has made me a smarter shopper.
Motivation To Get Better #3: Motivation To Reach My Goals
While I was motivated to get my net worth positive back in the day, calculating my net worth still motivates me today.
At the end of each month, I get excited to see what my net worth is. I am a competitive person and I want to see my net worth increase each and every month. I base many of my decisions on wanting to get further and further ahead financially so that I can be financially independent. You can classify me as an investor and not a debtor.
I look back at my chart of my net worth and see how over time I have increased it. Yes there are months when it drops, but the general trend is up. As I have invested more in the stock market, my money grows at a faster rate, increasing my net worth at a faster pace when the market goes up.
Of course, when the market drops, typically my net worth does as well. But I know in time, the market will come back so I don’t worry.
Below is the chart of my net worth from the day I started through the end of last month. The chart shows a steady incline with some bumps along the way.
The crazy part is that I can tell you what each large decline is. Housing/stock market collapse, student loans for graduate school, etc.
Your Takeaway: Your net worth can be a visual guide for how far you have come. It is easy to forget things in the fast paced world we live in. Having a visual reminder can excite and motivate you to keep getting better.
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 for a secure future and retirement.
It can be a warning signal if you are spending too much as well. I make a game out of it and work hard to consistently increase my net worth over time.
By not calculating net worth, you could be spinning your wheels, wasting time and not even know it. But when you calculate net worth, it can motivate and encourage you to reach your financial dreams.