I receive lots of emails like this one from Edward, asking about how to calculate your net worth:
I love your site. I have a question. I have read a lot of posts about people’s net worth. How do you calculate your net worth?
There are a lot of net worth calculators and software that can help you calculate your net worth. But to get the most out of the numbers you really should be able to calculate net worth on your own. this requires some understanding of what net worth is.
What is Net Worth?
In a nutshell, your net worth is really everything you own of significance (your assets) minus what you owe in debts (your liabilities). Assets include cash and investments, your home and other real estate, cars or anything else of value you own. Liabilities are what you owe on those assests including car loans, mortgage and student loan debt.
Net worth is a measure of your financial health because it basically says what you would have left over if you sold all of your assets to pay all of your liabilities. Every financial move you make should be aimed at increasing your net worth. This means either increasing assets, or decreasing liabilities.
For a longer look at net worth, check out What Does Your Net Worth Really Mean.
How to Calculate Your Net Worth
Calculating your net worth really isn’t all that hard. It just takes a bit of time, some scratch paper, and a calculator.
Make a list of all of your assets.
This includes retirement savings, your current checking and savings account balances, any bonds you might have, the total value of any stock holdings you might have, your home, and your automobiles. I usually don’t include any physical assets less valuable than my car, but you can do this if you wish.
I usually make a list that says ASSETS in big letters at the top. Underneath that, on the left, I list what the asset is and on the far right, I list the value of that asset so that the decimal points of all of the assets line up. This makes the calculation of your total value much easier.
Once you’ve listed every asset you can think of, write TOTAL in big letters over on the left, then add up the numbers. Once you have this total, you’ve got the total value of your assets.
Make a list of all of your debts.
You should list all of your credit card balances, personal loans, student loans, auto loans, home loans, and so forth. Much like with the assets list, I recommend a big header that says DEBTS, with each debt listed below that on the left side and the amount of the debt over on the right, with the decimals lined up for easy figuring.
Once you’ve listed all of your debts, write TOTAL in big letters on the left, then add up all of the debt numbers. This total is the total amount of all of your debts.
Take your total assets and subtract from that your total debt. The resulting number is your net worth.
Some Implications of Net Worth in Practice
What does a negative net worth mean?
Some people panic when they calculate their net worth and discover that it is negative. This is usually the result of a young earner with a substantial amount of student loans and also a loan on a rapidly depreciating automobile. Why is your net worth negative? You simply haven’t earned enough money yet to overcome the weight of the debt. Don’t worry, it will come.
However it can also be due to overborrowing. For instance, if you have racked up huge credit card bills, and are not paying them down. This creates a large number in the liabilities column, but no valuable asset to offset it.
How can I make it bigger?
Every time you make one of those debts smaller or one of those assets larger, your net worth will increase. So, you can increase your net worth by paying off your debts, saving and investing money, and reducing your spending.
On the other hand, your net worth goes down when you spend money on “small” things, such as clothes, food, and even interest on loans. Whenever you buy something frivolous, your net worth goes down.
How Often Should I Calculate My Net Worth?
I find it useful to calculate my net worth every month. My goal each month is to increase my net worth over the previous month, which means my expenses for the month was less than my income. I use the excess to pay down debts or increase personal savings.
Now that you know about net worth and how it changes, you could use a program like Mint.com to automatically calculate your net worth in real time and manage all of your finances. If you’re worried about online security, then simply stick to the longhand calculation ever month!