Calculating your personal net worth is a way for you to understand the overall status of your financial situation and also monitor its progress over time. Put simply, your net worth is the total value of all your assets minus the total value of all your liabilities.
Assets represent the things you own; such as cash in bank accounts, properties, investments, and even things of value that you own like jewelry, furniture, art or collectibles. Liabilities are things that you owe; things like loans, mortgages and credit card debt.
Negative Net Worth
For many, especially those early in their careers, their net worth is a negative number. While the goal should be to get out of the red, don’t concern yourself too much with the value of your net worth as much as whether it’s trending up or down.
As long as your net worth is consistently moving towards the black, you’re doing all that you can do. You’ll eventually even out.
Calculating Net Worth
When calculating your net worth, you will need to start adding up the total value of your assets. This number is easier to find with some assets than others. Finding the value of cash in a savings account or a retirement plan can usually be done in seconds as long as you know where to look.
Determining the value of investments can be a little more difficult given the volatile nature of the stock market.
Assigning a dollar value to possessions is probably the most difficult. Mostly because of depreciation, knowing the value of a tangible item at any point in time has its own challenges. It’s also worth noting that trying to include low-value items in this calculation is often more effort than it’s worth. Focus on the items that hold value over time and that can be appraised.
Once you get that number, subtract your liabilities from it. Your liabilities include any outstanding debt including credit card debt, any unpaid loans including student loans, car loans or personal loans, and any mortgages. Anything that you’re still paying down should total up into the total value of your deductions.
For example, if you own a car but are still paying down the loan, the value of the car should be included in your total asset value while the remaining amount on the car loan is a liability. Also, be aware that the value of the car when you bought it is not the same value as the value of the car now.
How often should I calculate my net worth?
You’ll want to calculate your net worth once or twice a year. As you pay down debts, acquire new things, or the things that you own depreciate, your net worth changes. There’s not much value in performing this exercise more often than that since day-to-day or even week-to-week changes are minimal.
Focus more on your long term financial goals and use your net worth calculations to ensure that you’re consistently moving towards them by spending responsibly and regularly paying down debt.