Whether you’re looking to get a snapshot of your overall financial health or looking to join the local Millionaire’s Club, understanding your net worth (and how to calculate it) is a big step towards a more secure financial future.
Many people wrongly insist that since they have a big house, several cars, and a good paying job, that their net worth is much higher than it actually is. In reality, they’ve failed to take into account who actually owns those assets– them or the bank.
In short, your net worth is a simple math problem. You take the total amount of your assets, subtract your total amount of liabilities, and voila, you have your net worth. This number is important because it tells you how much cash you would have left over if you sold everything you owned and used that money to pay off all of your debts. Tragedies and life-altering events can happen at any time, so it’s important to make moves to improve your financial standing.
In order to more accurately determine your net worth, you’ll need to do some quick math.
1. List All Your Assets
Take a piece of paper and write down every single thing that you own, from your house all the way down to your baseball card collection. Then, find comparable prices for all of those items, such as your house, your car, and other items. While you don’t need to necessarily have the exact numbers, it’s important to be as close to it as humanly possible. This process will most likely take some time, so be patient.
The huge caveat to figuring out your net worth in this way is that, in a real-world scenario, you’ll almost never be able to sell your assets overnight for what the real value is. If you were really selling your house, you would have to factor in realtor’s fees, negotiation, and closing costs. Those can change from realtor to realtor, but this at least gives you a solid starting point. Add up all of your assets into one final number, circle it, and write “TOTAL” next to it.
Once you’re done with this step, write “ASSETS” in big bold letters at the top of the page and place that sheet of paper to the side.
2. List All Of Your Debts
Now for the not-fun part. Take a second piece of paper and write “DEBTS” at the top of it. Then, go through your personal finances and make a list of all of your debts. Include your home loans, car loans, student loans, credit card bills, personal loans, and even the $100 you owe your neighbor dog-sitting while you were gone. Everything you have to pay back goes on that sheet of paper.
It can be tricky at this stage to figure out whether or not something is an asset or a liability. For instance, if your home is worth $350,000, but you still owe $185,000 on it, then you would list how much it’s worth on the “assets” page and what you owe on the “debts” side. It’ll even out on the end, but this keeps the two pages from overlapping and getting fuzzy.
Add up all of those debts into one big total number, and circle it as well.
3. Subtract Debts From Assets
This is the easy part. For the final step, take asset final number and subtract the final number you have for debt. Whatever that number is – even if it’s negative – is your total net worth.
Surprised? Don’t be. Most people are wholly unaware of the importance of their net worth or even how to calculate it in the first place. If you see a number that is deeply in the red, isolate the highest debts and try to eliminate them. You can use the “debt snowball” technique that Dave Ramsey recommends, or some other type of debt reduction plan to increase your net worth.
Make plans to check in on your net worth every few months or so; once you have a running tally of your debts, it should be easy to simply change the numbers and do a quick calculation. Remember, every time you pay a debt off, your net worth goes up, so every little bit counts!