Net worth is something that’s usually associated with celebrities, CEOs, and rising YouTube stars. Aside from these public figures, however, we don’t usually hear the term applied to everyday individuals.
Calculating net worth indicates there’s a certain amount of worth (or wealth) to calculate. An amount that most simply assume is greater than what they have.
Knowing your net worth, however, isn’t only for those in higher income brackets. It can help anyone — whether they’re starting a career or starting a business — get a clearer picture of their finances. Net worth takes into account what was earned and what was spent, and determines how you’re doing at the end of the day.
Interested? Read on as this post explains how to calculate your net worth, why it’s important, and how it factors into your overall finances.
What Is Net Worth?
The definition of net worth is actually quite simple — it’s your assets minus your liabilities. Because it considers all assets (not just salary or income) and all liabilities (not just monthly bills), net worth is one of the best ways to determine your overall financial health.
So what exactly makes up your assets and liabilities? Assets consist of anything owned by an individual that has monetary value, and they’re either categorized as liquid or non-liquid assets.
Liquid assets include cash or bank account funds, and are fairly straightforward and easy to quantify. Non-liquid assets, or fixed assets, are high in value but harder to convert to cash. This can be real estate, cars, valued collectibles, investment accounts, and the like.
In contrast, liabilities are any debts or loans that need to be paid, whether to an individual or an institution. They can be short-term, like unpaid credit card balances, or long-term, like a mortgage, car lease, or loan. As liabilities will eventually be taken away from your assets, they are an important factor in your net worth.
Simply put, assets are what you own, liabilities are what you owe, and the combination of both is your net worth.
Why Is Net Worth Important?
It’s easy to look around at your home, your belongings, and your well-maintained bank account, and assume you’re doing well. This, however, is like looking at only one side (the bright side) of a coin. On the other side of those assets are liabilities.
In fact, when someone is described as a millionaire or billionaire, this isn’t referring to their income or assets — it’s based on their net worth.
Net worth takes both assets and liabilities into consideration, and is one of the most effective ways to give an accurate assessment of your financial state.
When calculated once, net worth gives an overall picture of your current finances. A positive number shows you have more assets than liabilities (i.e., you own more than you owe), while a negative number reveals you have more liabilities than assets (i.e., you owe more than you own).
When calculated regularly over time, net worth can be used to keep track of any movements toward or away from your goals. While it’s normal to have low or even negative net worth at times, such as when you’re just starting your career and still paying off student loans, monitoring how the number changes over time can help you control your finances.
Are you responsible with your income? Are you mindful of your expenses? Ideally, all financial decisions should be made in an effort to increase overall net worth, which can be done by either increasing assets, reducing liabilities, or a blend of both.
How to Calculate Net Worth
The beauty of net worth is that it gives a complete picture of your finances, yet is still really simple to calculate. It’s basically addition and subtraction.
The three-step formula for net worth is as follows:
Step one: Make a list of all your assets, along with each one’s estimated current market value. Add all the values for your total assets. This includes cash, bank accounts, retirement accounts, investments, personal properties, vehicles, and high-value belongings, such as electronics, jewelry, or pieces of art.
Note: When calculating net worth, only include the fixed assets that are of significant market value and that you would actually sell. For instance, your beloved collection of shoes may not be as valuable as you think. And if there’s no way you would ever liquidate the watch your father gave you for graduation, don’t add it to the value of your assets.
Step two: Make a list of all your liabilities, along with each one’s estimated value. Add all the values for your total liabilities. This includes mortgages, car loans, student loans, personal loans, and credit card debts.
Step three: Subtract your total liabilities from your total assets. The resulting figure is your net worth.
Is your net worth higher than you expected? Lower? Either way, knowing your net worth is an important tool for tracking personal finances. And when used in combination with a monthly budget and other money monitoring methods, net worth can help you keep tabs on your budget and achieve financial growth.
The Best Ways to Calculate Net Worth
You can easily calculate net worth using a pen and paper or spreadsheet. If you’d rather use something more advanced, there are a lot of online tools, like on CNN Money or Nerdwallet.com, that you can use for free. Several personal finance apps, like Personal Capital and Mint, also offer net worth calculators as a useful feature.
No matter which method you choose, the first time you figure out your net worth is often the most difficult. You have to take inventory of all your notable assets and liabilities, and this can take a while. It gets much easier the next time around (we promise!), as you already have a running list to build on.
It’s best to calculate your net worth at regular intervals, such as monthly or quarterly. While it may be tempting to check on yourself more often, it’s unnecessary unless there’s been a big change in your finances (i.e., any major purchases or income received). Besides, you want this newfound awareness of your net worth to guide your spending habits, not obsessively control them.
When an Item Is Both an Asset and a Liability
When calculating net worth, you may come across an item that is a bit tricky to pin down. This is usually something of high value that you’re still making payments on — technically, you own the item, just not completely. For example, say the total value of your home is currently $750,000, but is being financed through a home mortgage that still has $200,000 left on it. In this case, you would list the house as both an asset of $750,000 and a liability of $200,000.
The same thing goes for any other item purchased through loans or financing, including vehicles, electronics, and the like. Simply list the full value of the item in your assets, and the amount you still owe in your liabilities.
Personal or student loans, however, should only be listed as liabilities. Although they may create added value in the future (i.e., a higher-paying job or increased money-earning opportunities), these are things that can’t be quantified yet and therefore, can’t be added to your net worth.
Examples of Net Worth Calculations
To get a better picture of how net worth calculations look, the following are examples for two different individuals:
Example 1: Thomas is a father of two. He purchased a house worth $500,000, for which he still has $150,000 left on the mortgage. He also has two cars, one worth $25,000, which is fully paid off, and one worth $30,000, with a car loan of $5,000 left. He has $5,000 in his checking account, $25,000 in his savings account, and $15,000 in his 401(k). His current credit card balance is $1,500.
The list for Thomas’s assets are as follows:
- House market value: $500,000
- Car 1 market value: $25,000
- Car 2 market value: $30,000
- Checking account value: $5,000
- Savings account value: $25,000
- 401(k) value: $15,000
Total assets: $600,000
The list for Thomas’s liabilities are as follows:
- House mortgage: $150,000
- Second car loan: $5,000
- Credit card balance: $1,500
Total liabilities: $156,500
Thomas’s net worth is: $600,000 – 156,500 = $443,500.
Example 2: Joan is a single 27-year-old who has just started a new job. She is currently renting an apartment and owns a car worth $30,000, for which she still owes $20,000 on her car loan. She has $3,000 in her checking account, $4,000 in her savings account, and $2,000 in her 401(k). She has $35,000 left in student loans and $2,500 on her credit card.
The list for Joan’s assets are as follows:
- Car market value: $30,000
- Checking account value: $3,000
- Savings account value: $4,000
- 401(k) value: $2,000
- Total assets: $39,000
The list for Joan’s liabilities are as follows:
- Car loan: $20,000
- Student loan: $35,000
- Credit card balance: $2,500
- Total liabilities: $57,500
Joan’s net worth is: $39,000 – 57,500 = –$18,500.
Note: Student loans are a common liability that unfortunately have no corresponding quantifiable asset. Some ways to help offset this amount are to decrease expenses wherever possible, or increase income through part-time jobs or passive earnings.
Make Your Net Worth Work for You
As you can see, net worth is one of the best reflections of your current financial situation. It shows how much you’ve been able to save, in relation to how much you have spent. With just a quick calculation every month or so, you can have a realistic view of where your money goes, and whether you’re moving forward or backward in your long-term financial goals.