Know your Net Worth
- info648672
- Jan 25, 2023
- 3 min read
An important step when taking control of your finances is to know where you stand today.
Know what you have, where you have it and how its working for you.
A net worth calculation is not just for the wealthy; it’s an important financial health check whatever your income level. Understanding your net worth – or the difference between your assets and liabilities – is an excellent way to evaluate your financial health and pinpoint areas where you may need to make changes.
In this post, we'll explore why calculating your net worth is important, how to do it, and what it can tell you about your current financial situation.
Net Worth Calculation: What it is and why it matters
If you're not familiar with net worth, you may be wondering what the fuss is all about. Simply put, your net worth is the value of everything you own minus any outstanding debts. This includes assets like your home, investments, and savings accounts, as well as debts such as your mortgage, credit card balances, and student loans. By calculating your net worth, you can get a comprehensive view of your financial standing, which can help you make informed decisions about budgeting, investing, and saving for the future.
Understand Assets versus Liabilities
Assets are those things which maintain or increase in value while you own them - they can be sold and turned into cash as and when you need to, and you retain at least the original amount you invested to acquire them. Liabilities are what you owe. Liabilities may be short term or long-term debt, but your goal should be to reduce your liabilities over time and increase your assets.
Ultimately, we want to see you move from negative to positive territory. And if you are already in positive, to teach you how to build on that.
So, what’s the Math?
Before we get to the net worth calculation, let’s get familiar with some of the items that fall into each category:
Assets | Liabilities |
Cash Accounts (Bank checking, savings, credit union accounts) | Current Bills |
Investment Accounts (Brokerage account, Mutual Funds account) | Mortgage and Home Equity Loans |
Retirement Accounts (IRA, 401k, Pension plan) | Credit Cards |
Valuable Jewelry, Art, collectables (items of significant value should be appraised to determine the value and insured). | Motor Vehicle Loans |
| Personal & Student Loans |
There are different opinions on whether you should include your home as an asset, but a simple way to consider it is to find out the current market value of your home and deduct what you still owe in mortgage payments. The difference between these two amounts can be considered with your assets. So, if your home’s market value is $300k and you still owe $250k on your mortgage, the remaining $50k can be included in your "assets" calculation.
When it comes to jewelry and collectables, it can be difficult to figure out the current market value. You can simply check the price that similar items have sold for by doing some online research. This will save you the cost of getting a professional valuation for now.
How to Calculate your Net Worth
Calculating your net worth isn't as complicated as it may seem. Begin by tallying up the value of all of your assets, including any property, investments, and savings accounts. Next, subtract the total amount of liabilities owed, such as mortgages, loans, or credit card balances. The remaining figure is your net worth.
ASSETS - LIABILITES = YOUR NET WORTH
What your Net Worth can tell you
A positive net worth means that the value of your assets outweighs your debts. You’re in a healthy financial position, you should focus on building your assets and continuing to decrease your debts as far as possible.
A negative net worth means that the amount of debt you owe is higher than the value of your assets. In this case, you need to focus your attention on getting your debts under control, particularly if you've become reliant on debt to meet your day to day living expenses. The good news is that you now have a clear picture of where the debt is coming from, so with support and qualified advice you can work on ways to reduce, consolidate and reassess your spending to cut down on what you owe over time.
It's never too early – or too late – to start taking control of your finances. Calculating your net worth is an essential step in this journey, providing insight into your financial health and helping you make informed decisions about your money. By understanding your net worth, you can identify areas for improvement, set achievable goals, and create a plan to achieve your financial dreams. Whether you're just starting your career or nearing retirement, assessing your net worth can help you take ownership of your financial future.
