Net worth may seem like a measure that only billionaires use when compiling their rich lists, but it is one of the easiest and most useful numbers any person can compute, no matter how many zeros they have in their bank accounts. Net worth is different from your salary, because it reveals you the complete story: assets minus liabilities.
It only takes a few minutes to figure out and the figure you come up with can sometimes tell you more about your finances than your paycheck does.
The Simple Definition
The formula to calculate net worth is Assets – Liabilities = Net Worth.
Assets: anything you own that is of value, cash, savings, investments, property, vehicles. Liabilities are the sum of all that you are obligated, credit card debts, loans, mortgage etc. Then, subtract one from the other, and you get your NET WORTH.
You have more than you owe if the number is positive. If it’s negative, then you are owing more than you have in your home, likely the case for those that are just starting out in their careers or have some type of student loan or mortgage that is in its initial stages.
Why income isn’t the same thing
Some people have a high income but a low net worth.There is no correlation between a high income and a high net worth. Income is money that is received. What really has been saved and accumulated over time is net worth.
A person with an income of $150,000 and who spends near his or her income without saving anything and has a maxed-out credit card may have a net worth of nearly zero or even minus. A $55,000 per year earner who regularly saves and does not accumulate high interest debt, could easily have a net worth that is ten times greater after 10 years, just because more has been saved, and not spent!
That’s one of the reasons that net worth is a more reliable sign of financial health than income. It’s not just about what you’re adding to your account every month, but it’s about your habits over time.
Step #1 lists everything you own (Your Assets)
Begin with items that are the easiest to estimate. Make use of checking and savings accounts. Checks investment accounts, retirement accounts or any brokerage account for balance. Then turn to bigger assets – the value of your home if you own one, the resale value of your car, and any other valuables or property you may have that you can sell and get some cash for.
Here you don’t need to get a professional valuation of your car or furniture etc, just a good estimate. The objective is not an estimate that will please your number but a realistic and honest number.
Step 2 is to make the list of all you owe (your liabilities)
These are your mortgage balance, any car loan, your student loan balance, personal loan balance, and your balances on credit cards you are currently paying. Add up the total of the balance due on each of these, not the original loan amount, the amount that you would have to pay if you paid them today.
In Step 3, you are going to subtract and determine your standing
Here’s what it looks like with real numbers. When assets are combined, they look like this:
Savings account: $4,000 Retirement account: $18,000 Car (resale value): $9,000 Home value: $280,000
Total assets: $311,000
And your liabilities are like this:
Remaining mortgage: $210,000 Car loan balance: $6,000 Credit card balance: $2,500 Student loan: $14,000
Total liabilities: $232,500
Net worth = $311,000 − $232,500 = $78,500
That’s the number. Not what you earn, not just your savings account, it’s your net worth, your real assets minus your debts.
If it doesn’t help, what’s it doing?
Examples of things that appear on both sides are your home and your car. The home is valued at $280,000, but you have $210,000 owed on the mortgage. So, your home becomes $280,000 in assets and $210,000 in liabilities. What this means is that your home has thus far contributed $70,000 to your total net worth.
The net worth doesn’t really have to improve with effort, each time the mortgage payment is paid off, the asset side is raised slightly more than the liability side.
Why a negative net worth is not a crisis!
You may have recently graduated from university with student loans or perhaps you just purchased your first home with a small deposit, but having a negative or low net worth is nothing unusual or a bad sign. Very much more important than the number itself, particularly at the beginning, is the direction in which it’s moving.
The actual number isn’t as helpful as the trend in your net worth you’ll know if net worth is increasing if you calculate it once a year and follow the trend, but you won’t know if it’s increasing if you only know it at one point in time. A negative $10,000 in this year and negative $4,000 in next year is in a strong direction, although the numbers are both negative.
How often is it advisable to calculate it?
For most, once a year is sufficient, say in January or date that is easy to remember, such as a birthday. If you are calculating it more frequently, say monthly, it is likely that it is more about fluctuations in the investments than about changing your financial behavior, and can cause undue worry over short term fluctuations.
The Bottom Line
Net worth is nothing more than what you have minus what you owe, and it only takes most people about 30 minutes to do this in a sincere manner. It’s a much more comprehensive view of financial health than income, as it shows not what you’re receiving in real time, but what you’ve accumulated over time.
If you have never done it, you will have a benchmark the first time you do it. If you repeat the process next year you’ll know if your financial decisions are working or not.
Frequently Asked Questions
Is a negative net worth a bad thing?
Not necessarily. So common, it’s expected to be a part of the students’ story, a new mortgage, or early career loans. The key thing is that your net worth is increasing over time, rather than whether it is positive at this time.
Should I include my home in my net worth calculation?
Yes. Include its current market value as an asset, and your remaining mortgage balance as a liability. The difference between the two is your home equity.
How often should I recalculate my net worth?
Once a year is typically enough. Calculating it more frequently often just reflects short-term market movement in investments rather than meaningful financial progress.
Disclaimer:
This article is for general informational purposes only and does not constitute financial advice. For guidance specific to your situation, consult a licensed financial adviser.
