Not aware of your net worth or haven’t looked at it in a while? You should. Knowing your net worth is an important part of developing long-term wealth. By knowing it you’re able to see what parts of your financial profile are holding you up and what parts are holding you back.
For myself, I use the number to evaluate my past saving and spending decisions. Save more/spend less and my net worth increases. Save less/spend more and my net worth goes down. Seeing my net worth go down isn’t very fun, so I try not to let that happen.
The point is, tracking your net worth is a great indicator of financial health. Things like shifts in the stock market or housing market definitely do impact your net worth, but over time you should see this number increase as you pay down debts, continue to save, and make smart financial decisions.
Now let’s get into it and discuss what net worth is, how to find it, and what to do with it.
What is net worth
Net worth is the value of your assets minus debts. Essentially, it is the value of what you own vs. what you owe.
An asset is anything with value – cash, investments, a house or other real estate, vehicles, or other items of value that you own. A debt is what you owe on those assets – your mortgage, car loan, student loan and other debt.
The theory behind net worth is capture your actual worth once accounting for your assets and debts. In other words, it’s what you would have left over if you sold your possessions and paid off your debts. In practice, it doesn’t quite work this way. You’re not going to wake up tomorrow and sell everything just to see how much your worth…. That’s what the calculation is for. Plus, holding everything you own in cash is a good way to not grow your wealth.
Instead, your net worth should be used to evaluate financial health and progress.
Since the calculation considers your entire financial profile (checking account, investment account, retirement account, real estate, student loans, etc.) tracking your net worth over time is one of the easiest ways to review your financials.
Calculating net worth
Calculating net worth is straightforward: Assets minus Debts. There are plenty of calculators on the internet that will do it for you, but I think it’s best to do it on your own. You will get more out of it and understand your situation better by doing it yourself.
I recommend using Google Sheets/Excel (or similar spreadsheet software) to capture the accounts and possessions that make up your net worth. This way, you can create a template once and then fill it out each month or quarter track progress. Here is an example of my mine:
This list is a summary. I have a more than one account rolled up under retirement, taxable investment and credit card. I find listing these accounts individually and then summarizing helps me review them better over time.
Now, on to the calculation…
Step 1: Make a list of your assets
For the listing phase of the calculation, take a few extra minutes if it’s your first go at it to make sure you’ve remembered everything. It’s easy to forget older/less-used accounts (I’m guilty of doing this…). Taking time up front will make it easier later. (On a side note, doing something right the first time will always make it better in the long run! Just my take on this journey called Life.)
I suggest using groupings like “Cash”, “Retirement”, etc., like the above example. This helps the organization effort. But be sure to use subgroups like “checking account” and “emergency fund” under a category like cash. You’ll want to list each account as a single line, and then roll them up. Don’t like that idea? That’s fine, you have creative control on your list! As long as you keep the assets and debts in the right category.
Your net worth should be used to evaluate financial health and progress.
When it comes to physical assets that change over time, like real estate or a vehicle, don’t worry about updating them too often. A house you may update once a year. For a vehicle, twice a year is enough.
Step 2: Make a list of your debts
Again, your debts include a mortgage, auto loan, student or personal loan, credit card balances, etc. Essentially, if you borrowed for any reason and need to pay it back, it’s a debt.
Debt values are easier to capture for things like a house or vehicle. Since you’re not determining the worth of the item, you simply find the box on the latest statement that says how much you have left to pay. Same goes for the credit card payments or student debt. Be sure to include the total amount owed, not just the amount you are going to pay this month.
Just like when listing the assets, take a few extra minutes here to get this list right if it’s your first time.
Step 3: Do the math
Add up your assets and your debts. Your assets will be a positive (+) value and your debts will be negative (-). Take the difference between these and you have now calculated your net worth.
Math tip: if you list your assets as positive and debts as negative, you’ll actually have to add them together to get the difference due to the negative sign. If you list them with their absolute value (both positive numbers, no negative sign) then you’re able take assets – debts to find the correct value.
Tracking your net worth over time is one of the easiest ways to review your financials.
Step 4: Evaluate
Now that you have your net worth, it’s time to take a good look at it. If this is your first time calculating it, you may have been surprised by the outcome. Surprise isn’t bad the first time, but going forward you should be able to reliably predict how your net worth will change based on the decisions you make.
Whether you were surprised or not, it’s worth digging into the outcome to see what the main drivers of the value are. Perhaps you’ve been an awesome saver, always maxing your 401k, saving diligently outside of that, and living within your means. If this is you, your net worth is probably looking great. Then again, if this is you I’m willing to bet you already have a pretty good grasp on what it takes to build wealth.
The more likely scenario will be that you find it’s not as high as you were expecting (or hoping, for that matter). That’s where I was the first time I calculated it. What got me was an auto loan (more on that in a different post…).
What’s dragging yours down? Student loans are a big one here, as there is no offsetting asset to put against the debt like a house/mortgage relationship. Other culprits are credit card debt and auto loans.
The important part here is to identify areas for improvement. It’s not time to get down on yourself if you have some debt, but rather a time to get motivated to improve/increase your net worth. Play the long game here. Wealth isn’t built overnight.
What to do next
Whether positive or negative, there are always ways to improve your net worth. Smart financial decisions like saving, living below your means, not taking on unnecessary debt or paying down debt are all ways to accomplish this.
Since net worth is a math formula with two variables, the way to affect the outcome is to change one or both of the variables. Therefore, there are two ways to improve your net worth: increase assets or decrease debts.
In my opinion, paying down debt is one of the first things to focus on when looking to improve your net worth. Focus on your high interest debt first – this will likely be any credit card debt. Next take on that auto loan (and try not to ever have one of those things again…), then move on to those student loans if you have them and then your mortgage.
Aggressively attack this debt – especially the high interest credit card debt and auto loan. An average auto loan in the US is $503! That’s over $6,000 per year!
Once you get rid of this bad debt, you’ll start to see more money left over in your monthly budget. It’s important to save this money and not left lifestyle inflation occur.
Play the long game here. Wealth isn’t built overnight.
Why net worth is important to long-term wealth
Like I said above, your net worth should be used to evaluate financial health and progress. In order to create long-term wealth, you have to take steps now to make the chance of that happening more likely. Because net worth tracks your entire financial picture, it’s a great way to track your progress against a long-term goal.
Measuring your net worth over many years will provide valuable insight and motivation for your personal finances. Making smart financial decisions will nearly always improve your net worth, and thus your ability to create that long-term wealth we all shoot for.
In the simplest form, improving net worth is done by increasing assets and decreasing debts (i.e. save more and spend less).
If you still haven’t figured out you net worth, it’s time to do so. It’s a great first step to taking charge of your finances and creating long-term wealth and financial security.