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The term net worth has a nice, rich-person ring to it, doesn’t it? But you’re wrong if you think it’s only for the mega-rich; everyone has a net worth.
Checking your net worth is like using a thermometer to check your temperature (your financial temperature). If your temperature spikes up, you’d likely go to a doctor for testing. The same goes for your financial/net worth temp, except that a high number isn’t a concern. It’s a low number (especially a negative one!) that requires us to dig deeper to access and diagnose the cause of the problem. It could be a lack of savings or a high student loan debt balance that’s creating a negative net worth. The lower your net worth, the further you are from financial health and wholeness.
If your net worth is super high…well, then you’re either Beyoncé—Hey, Bey!—or you’re doing something right (at least with your coins).
For the rest of us, the goal is to get up to a positive net worth, even if it’s just positive by $100, $200, or $1,000. So get ready to discover the components of net worth, how to calculate your own, and how to put yourself on the path of achieving your net worth goal.
Net Worth
To attain a positive net worth (owning more than you owe), and establish a net worth goal and strategic plan to increase it. Net worth is a number that reflects a simple subtraction of your liabilities (what you owe) from your assets (what you own). It’s not a number that grants you any special privileges—like a credit score—but it is an important financial indicator nonetheless. It can mean that you are in the positive, financially speaking, and this can show that you have built and are building wealth. A positive net worth might mean that you are putting yourself in a position to live off the money you’ve made, saved, and invested for retirement and wealth building. Net worth is also not a static number—you can nudge it in either direction through your financial decisions.
Calculate Your Net Worth
Net worth is a stand-alone representation of your basic financial health. It says nothing about your accomplishments, character, or success, what kind of businesswoman, mom, or cook you are, or whether or not you can tear up a dance floor at a wedding reception; it’s simply the number you get when you plug your personal finance information into an equation.
Assets (what you own) – liabilities (what you owe) = Net Worth
Depending on the information you plug into this simple calculation, you might end up with a negative or positive net worth or maybe even a zero net worth. It’s important to note that the outcome can have nothing to do with the amount of money you make. You might make less money than someone else but have a higher net worth because you have fewer liabilities than assets and they don’t.
When it’s time to take stock of your own net worth, you want to make sure you get everything into the calculation—if you leave something out, you will have an inaccurate picture of your net worth…and that will be kind of, well, worthless.
Assets (What You Own)
Cash is an obvious asset, but it’s not the only player in town. Assets are anything you own that has value. Think of assets as something that puts money into your pocket, like:
- Stocks
- Real estate (the value): residential, commercial, or undeveloped land
- Car (most cars are depreciating assets. That means it’s worth less and less the older it gets)
- Jewellery, art, collectables
- Savings (cash)
- Precious metals
- Equipment
Liabilities (What You Owe)
These are less fun to talk about but important all the same. Liabilities are things that you owe to other people or entities; think of a liability as anything that would take money out of your pocket, like:
- Bank loans
- Student loans
- Car loans
- Mortgage and home equity loans
- Credit card debt
- Income tax debt
- Outstanding bills (such as hospital bills or personal loans)
At this point, you may have done some rough estimating in your head and think you have a sense of your sum. Maybe you’re thinking OH NO, I’m going to be way in the negative… or maybe I’ve just got a little baby positive there…or maybe you’re an always think you look good kind of girl or boy, and you’re thinking I know my net worth is next level.
Stop overthinking and worrying about what you’re thinking. It’s like staring at a scale before stepping on it and deciding how you feel about yourself based on a number you’re not sure of. When it comes to figuring out your net worth, guessing is often way off because many people have never calculated this number for themselves. Instead of making assumptions, just look at the actual numbers to understand your financial situation.
So it’s time to start identifying your assets and liabilities. You’ll want to write them down using the Net Worth Worksheet
Getting Good with Your Assets
Here are some tips and questions to ask yourself when identifying assets and asset value:
- To make it easy on yourself, start with the most obvious asset, which is cash. This means just looking at your savings. Don’t use your checking account balance because if you’re like most people, this is really up and down; it’s money you’re using daily so it’s not exactly safe and saved.
- Do you have a stamp, coin, or even an antique license plate collection? Not all collectables have value, but some do and you want to consider those in your assets. If you have not ever had your collection appraised, it’s time to look into doing so.
- Do you own precious jewellery? Art? What did you pay for these things? If you inherited them, what are they worth now?
- If you have stocks, pull up your most recent statements and make note of their current market value.
- If you own property such as a car and/or home, you will want to get the value of these assets as close to the fair market value as possible. For cars, you can go to Kelley Blue Book to see what the current value is. For homes, instead of using the appraised value, try searching for a home value estimator online. These won’t always provide a super accurate number but should put you in the right range. The benefit of using a home value estimator versus the appraised value is the estimator accounts for what other similar homes in your area have recently sold for. And you want to know if you sold your house today what you’d likely get for it.
You will want to write down the full amount of what these assets are worth, not just the equity (the part you own) you have in them (we’ll balance this out with any amounts owed on these assets in the liabilities column).
Get Good with Your Liabilities
Now we move on to liabilities, which are admittedly not as much fun to add up as assets. Just keep in mind that your liabilities already have a number and not knowing what it is won’t change a thing, but knowing will give you the information you need to initiate change.
A few tips:
- Start by thinking about people or entities to whom you owe money, basically anywhere you have a balance even if you don’t get a statement. This could mean the money you owe your parents for helping you out with a down payment; it could mean the balance you owe to the hospital for when you had a baby or when you hurt your back; it might mean what you still owe on your car that you bought three years ago…these are all liabilities.
- What’s not a liability is any bill that you pay off each month. For example, utility bills, including water and gas and electric, cable, and so on are not considered liabilities. The exception to this rule is if you have a past-due or accumulated balance that you’re carrying on your account—this number would be counted as a liability.
- The same goes for any kind of credit card debt—if you pay off the card each month, you would not count that as a liability. But if you only pay off some of the balance, the amount that you are carrying will need to be added to your liability list.
- If you have a mortgage, you want to include the current balance of your home loan (not the original loan amount…unless this mortgage is brand spanking new and you have yet to pay any of that loan down!). The current balance might seem like a large number to have to include, but remember that you are also noting the estimated value of your home in the assets column. So once you subtract your home’s value from your mortgage balance, your equity will contribute to your net worth. Use this same thinking for your car. (Excerpt is from “Get Good with Money” by Tiffany Aliche).
So, do this exercise and save this data for future reference. You can repeat the same exercise every quarter and judge your net worth whether it’s growing or not.
