I often get questions related to net worth. One of these common questions is: “how can I easily calculate my net worth?”.
Well, it’s actually pretty straightforward.
Our net worth can be used as a very useful tool to help us evaluate our current economic status, and it even lets us gauge our financial progress every month or year.
While it’s true that you can find various net worth calculators online to help you estimate your current net worth, the problem is that they won’t really provide you with all the information you need to know. By learning how to calculate your net worth on your own, you’ll definitely be able to get the most out of your numbers.
That might require a bit of an understanding, and that’s why I’m here to help you out.
What exactly is your net worth?
Before we get started, let’s first have a brief explanation of what net worth is.
In general, net worth refers to the total value of all your assets or simply the stuff you own that have monetary value minus your liabilities (referring to loans or accounts you’re currently paying off). These assets can be classified as either liquid or illiquid assets.
Liquid assets are those cash you have in hand or essentially an asset that can be readily convertible to cash. Meanwhile, illiquid assets are those that are oftentimes hard to sell due to their high value.
For example, in my case, I have some liquid assets such as:
- Cash in hand
- Cash in my bank account
- Government bonds
- Accounts receivable (money owed to me)
Meanwhile, my current illiquid assets are as follows:
- Art collectibles
- My current property
The list can go on, but to give you a general idea, a liquid asset is something you can readily convert to cash while an illiquid asset will take you a while to do so.
Why calculating your net worth matters
Now that we have an overview of what net worth is, it’s time I explain to you why you need to calculate your net worth. However, I highly recommend doing so on a monthly basis. There are 3 main reasons why I believe you should do it every single month. They’re as follows:
1. You can track your financial progress
It might not sound much, but having the ability to track your financial progress will give you an insight as to whether you’re moving forward with your finances or not. If there’s a decline in your net worth, it only means you have more work to do.
2. It gives you a proper perspective of your debts
Having huge debts might sound scary, but as long as it’s more than offset by a major asset position, then it might not be as bad as it sounds. For example, if you have a $10,000 total but with a $50,000 asset, then you can somehow rest easy knowing that your debt level isn’t that extreme.
3. You can use it to apply for a loan
For me, this one’s the most important reason why you want to track your net worth. It’s simply because most lenders often consider your net worth as an indicator of your overall financial strength. This also allows them to decide whether to approve you for a loan or not. Remember that nearly all debt is bad!
How to calculate your net worth
It might sound too complicated, but to be honest, calculating your current net worth isn’t really difficult. In fact, all you need is a piece of paper, a calculator, and a bit of time. Let’s get started.
1st Step: List all your assets and add them
First things first: list your assets. However, I personally make it a point to list only my stuff that has substantial value and disregard any low-value item. You can include your property’s value, cars, jewelry, collectibles, etc.
If you own a business, you should also include the current value of your business. However, do keep in mind that you should NOT include your salary in the computation since it’s not part of your net worth.
After listing all your assets, add them all up so you can obtain their total value.
As a good reader noticed, you should, of course, deduct tax from assets that are yet to be taxed to get the right value of your net worth.
2nd Step: List all your debts and add them
After that, you then have to list all your debts. These include everything you owe to lenders or creditors. A few good examples would be mortgage balance, personal loans, business loans, student loans, credit card balance, tax liability, and more.
Once you’ve listed them all, compute their total value and proceed to the third step.
3rd Step: Subtract your total debt from your assets
With all your total assets and debts computed, the next step is to simply subtract your total debts from your total assets. The resulting number will represent your current net worth.
It’s really that simple. However, there are some financial experts who recommend not including certain assets like your property or your car in your calculation. Their reason is that if you don’t have any plan in selling them to pay off debt or invest them, then there’s really no point including them. I believe you should add parts of your real estate to your net worth.
However, it will ultimately be up to you to add them or not.
What if you have a negative net worth?
What happens if you find out you have a negative net worth?
It happens at times, and I’ve also had the same experience. However, just because you have a negative net worth doesn’t mean you have to panic. In some cases, you might have a negative net worth since you just graduated from your university – though this only applies to those with a student loan.
A negative net worth could also mean you’ve borrowed too much money than your current assets can cover. This borrowed money could be from a number of sources like your mortgage, personal loans, car debts, etc.
Fortunately, there’s no need to fret. Even if you’re experiencing negative net worth right now, and even if your financial situation looks dire, you still have time to improve your net worth as long as you know how to manage your finances and make it a priority.