Brian O’Connell* says knowing how to calculate your net worth is the first step in getting a grip on your long-term financial plan.
Photo: CherriesJD
Knowing how to calculate your net worth is no luxury — it’s a personal financial necessity.
Your net worth establishes the progress you’re making on an ongoing basis and helps shape future financial decisions that involve assets and debt.
Such decisions could include buying a home, getting married, having a baby and starting your own business, among other “big picture” household financial scenarios.
Having the right figures via a net worth calculation makes those decisions and scenarios easier to evaluate.
Not having a good grip on your net worth has the opposite effect.
As a result, serious financial mistakes can be made without the knowledge of your net worth and the impact that figure has in big money decisions.
What is net worth?
Your net worth is the total figure calculated after accounting for your total financial assets and total financial liabilities.
That means adding tangible assets like your home and investment portfolio and subtracting from your total assets figure to account for all of your debts, like a mortgage or credit card debt.
The number left after adding up your assets and subtracting your debts is, in essence, your net worth.
It’s also your total cash value available if you sold your assets and possessions and used the cash to pay down your remaining debts.
There’s certainly no guarantee that your total net worth figure will wind up in positive territory.
If your liabilities outweigh your assets, your total net worth figure would be a negative one — and a signal that you’ve got some work to do to put your financial house in order.
Ideally, you should update your net worth figure at least once a year, which gives you a benchmark figure you can use to evaluate your current financial situation against future financial needs.
How to calculate your net worth
The good news on calculating your net worth is it is fairly easy to accomplish.
Here are the key steps to get the job done:
Gather all of your financial data
That process starts with collecting all your key financial data — all of your financial assets and all of your financial liabilities.
That list should include investments, the value of your home, bank account totals, collectibles and valuables, and key possessions like your car and household possessions.
On the debit side of the ledger, include your mortgage loan, student debt (if any), auto loan debt, and other key household liabilities.
List your total assets
Make a complete list of your total assets, with the largest assets listed first, followed by your next largest assets, and continue sequentially down to the last item at the bottom of your list.
List the value of your assets in current dollars.
If you’re having trouble estimating the value of big-ticket items like a home or car, there are online sites that can help.
Add up your total assets
Add the total value of your assets and list the resulting amount.
This figure is your total assets.
List your total liabilities
Next, make a complete list of your total liabilities, with the highest debt figures listed first, and the rest added sequentially until you get to the bottom of your liabilities list.
Add up your total liabilities
Total up all of your liabilities.
This figure represents the total sum of those liabilities.
Estimating your net worth
To arrive at your total net worth figure, just subtract all of your total liabilities from your total assets.
The figure remaining is your total net worth.
Now you have a launching point to improve your financial health going forward.
Calculating your net worth: Key terms to know
Get to know these terms before starting your net worth calculation process:
- Assets: Your total assets include personal property, like a home or a vehicle you own, or key household collectibles and valuables, like jewellery or a stamp collection.
- Liability: The term liability refers to money you owe, like on a mortgage payment or a credit card account.
- Liquid asset: A liquid asset is a financial asset you can sell quickly and easily, like stocks, mutual funds, or valuables.
- Illiquid asset: An illiquid asset is an asset that can’t be sold quickly and/or easily, without resulting in a financial loss on the transaction, like a home with negative equity or a poor-performing stock that’s worth less than you paid for it.
- Personal property: Personal property means an asset you can physically move, like a piece of jewellery, a painting, a vehicle, or valuable electronics.
- Standing property: The term standing property refers to a fixed, immovable asset, like real estate.
A key tip when calculating your net worth
Be realistic and err on the side of being conservative on the value of your assets when calculating your net worth.
You don’t want to overestimate your assets, as that would provide an inaccurate snapshot of your current net worth, and could lead to financial headaches down the road when making big household money decisions based on faulty net worth data.
Also, make good use of one of the many online financial calculators when figuring out your net worth.
The goal in calculating your net worth
The goal in estimating your net worth is to know the final number and use it as a barometer going forward to pay down debt and improve your financial standing.
Conversely, wasteful spending on things like constantly dining out or buying expensive clothes and jewellery will bring your net worth number down.
Knowing your net worth makes it much easier to improve your financial health, by giving you a starting point on your personal financial journey — one asset and one liability at a time.
* Brian O’Connell is a freelance writer and former Wall Street bond trader. His website is brianoco.contently.com.
This article first appeared at www.thestreet.com.
