The Steps Needed To Calculate Your Personal Net Worth
Net worth – or how much monetary value you have in your possession, whether in the form of cash or possessions and either positive or negative – is an important factor in determining financial health and figuring out where you want to go.
Your net worth is calculated by adding up all of your “assets,” or possessions that contribute to positive net worth, and “liabilities,” or items that represent a drain on your financial resources. It’s generally taken as a snapshot of financial status at a specific period in time and so should be calculated regularly.
But how does one begin calculating their net worth? Is it even something that can be done accurately at home? Read on to learn more about the steps you’ll need to undertake to calculate your net worth, as well as how to use the information you learn from this process.
Why You Want to Calculate Your Net Worth
So, why would you even want to calculate your net worth in the first place? Think of it this way: you likely visit the doctor when you get sick, but you also probably go to the doctor once a year for a general health exam and/or physical (and if you don’t, you should!). This is just an annual “check-up” to ensure that everything is functioning and developing normally and healthily.
Calculating your net worth is no different, except in regards to your financial health. Your net worth is indicative of your financial well-being. It helps you know if you’re meeting your long-term financial goals. It also allows you to see which items are holding you back from meeting your current goals.
A snapshot of your net worth can help you to determine what steps exactly you’re going to need to take to ensure you’re able to meet your financial goals. You may want to calculate this regularly, on the same date over time, to view patterns in your data and make sure you stay on the right track. For example, calculating your net worth on the same date every month is very helpful.
How to Calculate Net Worth
So how exactly is net worth calculated? You’ll want to start by adding up all your assets and all your liabilities. Then, subtract your liabilities from your assets, and you’ll have your “net worth,” or the total value of everything you own – or owe. If your net worth is negative, it means you owe more than what you currently have. If this is the case, you’ll need to focus your goals on getting out of debt before taking further steps.
Additionally, don’t worry at this time about how much income or expenses you’re projected to have unless they’ve already been incurred. For instance, if you have an outstanding medical bill, you can include that as a liability if you haven’t paid it yet. But if you know you have a doctor visit coming up that will cost $350, that’s an expense, not a liability.
Liability only refers to debts currently owed. Similarly, if you know you get a $350 paycheck every week, you can’t count it as an asset unless you currently have that paycheck in your checking account. That is an entirely different process known as drafting an income statement, and it’s not what we’re doing here.
Add Your Assets
The first step in calculating your net worth is to add up all your assets. Your assets include everything you own that has a clear monetary value. Your assets may be liquid – as in, you can spend them immediately and not have to sell them first, such as cash, gift cards, and checking accounts – or non-liquid, such as a car or house.
Examples of assets you may include are property owned, cash, gift cards, expensive items you’ve had appraised such as jewelry, vehicles, and investment accounts such as CDs.
Add Your Liabilities
Next, you’ll want to add up all of your liabilities. Everything you owe to someone else is considered a liability; this is money you’ve borrowed from someone else and can’t really count as your own. Examples of liabilities are mortgages, loans, credit card debt, or outstanding bills.
And there you go. All you need to do now is subtract your liabilities from your assets, and you have your net worth. If necessary, you can utilize a net worth calculator to help you with this. You can find one easily with a quick Google search.
What to Do if You Have a Negative Net Worth
If you find yourself with a negative net worth, you may want to consider refinancing with a professional or firm’s help. At this point, your primary goal needs to be bringing yourself up to positive net worth, or at least a balanced one.
You can follow this up with an income statement that will allow you to see more clearly where your expenses are going and maybe try to cut back on some of them to pay off other debts faster.
You may also choose to go the other route and increase your income instead by picking up a side hustle, investing, taking on extra hours at work, or simply changing jobs or adding another.
In conclusion, calculating your net worth may take some time out of your day, but it’s an important process to undertake if you want a good picture of your financial health. All you have to do is calculate your assets and liabilities and subtract them from each other. Doing so can help you identify where you are, where you want to go, and the steps you’ll need to take to get there.