How to Calculate Your Net Worth
Net worth is one of those terms that is thrown around a lot that not many people can actually define. We love to talk about the ridiculously high net worth of the billionaires we love to hate. When you search for “net worth,” one of the top results is www.celebritynetworth.com/. But what does net worth actually mean?
The official definition of net worth is assets minus liabilities. (Super clear now, right?)
Assets: things you own
Liabilities: things you owe
You have to think of net worth as what you are worth as a person. Just kidding. DO NOT THINK THAT!!!! Your net worth has NOTHING to do with your self worth. You are a valuable person with lots of inherent value just the way you are. I’m joking about this not because it is actually funny, but to draw attention to the fact that many people have been programmed to think that how much money they have or earn has something to do with their worth as a person. It’s really important for you to understand that these two things are completely unrelated.
Instead, your net worth is a snapshot of your total financial situation in a moment in time. It’s just numbers. That’s all. It says nothing about who you are or your value in the world.
So why do we even care about net worth? Hint: it’s not so we can mock and compare ourselves to people who can afford joy rides in space or social media companies.
We care about net worth because it helps us compare our current situation to our past situation. It helps us know if we are moving in the right direction with our money. That’s it. We’re just comparing how we’re doing now to how we did in the past. No big deal.
Your goal is to increase your net worth so that you can improve your financial position and eventually have the freedom to live the life you want without having to think about money (as much).
How to calculate your net worth
There isn’t just one way to calculate net worth. When you take the CFP classes to become a Certified Financial Planner, they teach a fancier, more complex way of calculating net worth that more closely resembles the way you’d do it for business finances. That’s way too complicated and unnecessary for most people—unless you like calculating current and long term liabilities and the appropriate amount of interest for each. (Yeah, I didn’t think so.)
Most people should be fine using a much simpler definition and method of calculating net worth.
Net Worth=Assets-Liabilities
What are assets?
Assets are things that you own. In particular, they are things that you can sell for money. This includes your home, bank accounts, retirement and investment accounts, other real estate, the cash value of permanent life insurance policies, valuable art and jewelry, cars, business interests, etc.
How much of this you actually include is up to you. I personally do not include my car because I don’t want to bother researching the current resale value and I plan on driving it into the ground, not selling it.
Also, you don’t want to go crazy trying to figure this out. It might not be worth your time to record a $5000 ring you’re going to hold onto forever. A good question to ask yourself is: would I ever sell this to get money? If so, include it in your list of assets. (Side note: it is a good idea to have a list of these items and their values for insurance purposes.)
Calculating the value of your assets
The value of your asset is the amount you could get for it if you sold it today, minus the cost of selling it.
Home and real estate: use Zillow or another realtor’s website to get a home value estimate. Subtract the average cost of selling a house in your area.
Cars: use Kelly Blue Book or similar site to find out the resale value of your car.
Bank accounts: current value
Retirement and investment accounts: use the current market value.
Cash value of permanent life insurance: use the cash value amount. Note, this is not the benefit amount (what you’d receive if the insured person died).
Other valuables: if you’re including other valuables, particularly if you bought them as an investment, it’s best to get an appraisal.
A note about investments: Investments naturally fluctuate in value. Don’t let these normal market changes affect your mindset and feelings too much. If the market has crashed and your net worth took a nosedive, you may want to calculate your net worth without your investments for a while so you can focus on the things you can control. Work with a registered investment advisor or Certified Financial Planner to make sure that you have an investment strategy that is appropriate for your risk tolerance and goals. (Make sure your advisor is fiduciary.)
What are liabilities?
Liabilities are things that you owe. If we were doing this the official business-y way, we might try to calculate the present value of the future alimony payments or something like that, but we’re not, so we’ll keep this simple. You can think of liabilities as debt. This includes past due amounts on credit cards, unpaid amounts on buy now pay later plans, student loans, personal loans, and mortgages. Is it something you have to repay? It’s a liability.
Calculating the value of liabilities
Using this simplified method of calculating net worth, you are going to add up the total outstanding amount on your debts. Look for the amount you would pay if you were to pay it off in full today. Note: this is not the monthly payment.
Mortgage: total remaining balance on your mortgage plus any fees for paying it off early.
Student loans and other loans: same as mortgage. Look for the payoff amount.
Credit cards: only include balance on cards that are not paid in full every month. Record the total outstanding balance that you would pay if you paid it off today.
Buy now pay later plans: include total amount that has not yet been paid.
How to track and calculate your net worth
You can use any method you like to keep track of this information, from a bullet journal to a spreadsheet to an app.
You can get a free copy of the spreadsheet I use (with instructions!) by clicking here. Just enter your email address and I’ll send you the Google sheet that you can copy and customize to your heart’s content.
Here are the key steps:
List your assets and the current values.
List your liabilities and the current values.
Subtract your liabilities from your assets to get your net worth.
Repeat every month.
When you include the value of each asset and each liability (instead of just the total), you can see over time which items are actually changing. For example, you might see that your net worth is up (yay!) because the stock market and your investments are doing well, but also notice that your debt also increased, so your net worth stayed the same.
Increasing your net worth
As I said above, your goal is to increase your net worth. (But give yourself some grace during those normal stock market fluctuations.)
There are two ways to increase your net worth:
Decrease your liabilities
Increase your assets
You can decrease your liabilities by paying off debt and you increase your assets by buying more investments or property that you hope will increase in value or provide income.
The value of net worth
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The value of calculating your net worth is that it helps you understand your current financial situation and gives you a point of comparison over time.
In fact, when you are paying off debt, I still prefer to track net worth because it is a more positive indicator. It feels a lot better to say “I’m working on increasing my net worth” than it does to say “I’m trying to pay off debt.” This can be super important when it comes to staying motivated.
Plus, once you’re done paying off debt, focusing on your net worth helps you continue putting that money to use in building wealth and financial freedom.
Building net worth, whether you have debt or not, is the best way to achieve your goals, build a life you love, and live the way you want without making all of your decisions based on how much money you have.
