Net Worth. What is it and Why is it Important?

If you google net worth the first thing that pops up is the Wikipedia article. It defines net worth as “the total assets minus total outside liabilities.” You can look at this for a business or for an individual. For you and me it basically means add up the value of everything you own and all your money then subtract all your debt, like your credit cards, car loans and mortgage.

 

So what does it mean?

Theoretically your net worth is what you would have if you sold everything you had and paid off all of your debt. This can be good to calculate since it can give you an overall picture of how healthy your financial situation is. Typically this number is positive. That means that if you sold everything you owned you could pay off all of your debt and have some left over. In some cases this might be negative. That would mean that you’d have debt left over after you sold everything you owned and used all that money to pay debt. This can be a difficult position. It’s unfortunately where a lot of people start their financial journey. This is where I started mine.

 

I calculated my net worth then and I still calculate it regularly. If you do it over time you can see how you change and how your finances are getting better. If they aren’t it can let you know early so you can make changes. You can use this number as a general guide. You can also use this number to set broad goals. For example, you could set a long term goal to have a million dollar net worth by the time you’re 60. Then set intermediate goals to help you get there.

 

How do you calculate net worth?

This is usually a simple process for most people. The more complex your finances the more complex it is to calculate. You’ll want to start by gathering all of your financial paperwork including bank statements, credit card bills, student loan records, appraisals, an another other paperwork that shows what you owe someone or what something you own is worth.

Calculate your assets.

First list all of your major assets. If you own your home include that. Include your cars. Include any other property you have.

Then list all of your bank accounts, including checking and savings, any brokerage accounts, your IRA, your 401k or any other money accounts that you have.

If you own any other major property list it also. Most people won’t include anything smaller than their car, but you can include everything you own. This might include business property, collections, your TV or any other valuable items that you own.

Then add up the value of all of your assets that you listed. This is your total asset value.

Calculate your liabilities.

Now list all of your debt. You only need to list the amount still owed. This includes major items like a mortgage, any car loans, any student loans, and all of your credit cards. Include smaller items too like store credit cards. List any other debt that you will have to pay someone back.

Add up all of the debt you listed and that is your total liabilities.

Calculate your net worth.

To calculate your net worth simply subtract your total liabilities from your total asset value. That’s your net worth. I recommend doing this at least yearly so that you can track your progress. The higher this number is the stronger your financial situation probably is. If the number is negative I recommend getting this number back to positive as fast as you can.

 

What to do about it.

This is your next step. Once you know your net worth you can begin looking at your liabilities and your assets and decide where to go. If you have a lot of liabilities then work to pay them down as fast as you can. Once those are low you can work to increase your assets.

 

How often do you calculate your net worth? What other methods do you use to track your progress?