How to Calculate Your Net Worth
Before you can start meaningfully planning for where you want to go, it’s important to understand where you’re starting from financially. Knowing how much it costs to fund your lifestyle (your burn rate) is one key metric. Another essential metric is your net worth, which gives you a comprehensive view of your financial health by showing the difference between what you own and what you owe. Understanding these metrics allows you to know your starting point and lays the groundwork for you to set realistic financial goals for yourself.
What Is Net Worth?
Net worth is a simple yet powerful measure of your financial standing, calculated by subtracting what you owe (liabilities) from what you own (assets). Regularly calculating your net worth helps you track your financial progress and identify areas that might need attention.
How to Calculate Your Net Worth
Start by compiling a list of your assets and liabilities. Here’s a quick guide to help you get started:
1. Assets
Liquid Assets: Include cash, checking and savings accounts, and any other easily accessible funds.
Retirement Accounts: Add up the current values of your 401(k), IRA, or other retirement savings.
Investments: Include non-retirement investment accounts, stock portfolios, or other securities.
Hard Assets: These can include real estate, vehicles, or valuable collectibles. Use current market values, not purchase prices. To simplify, consider excluding any hard assets worth less than $5,000.
2. Liabilities
Mortgage: Include the remaining balance on your home loan.
Auto Loans: List any outstanding car loan amounts.
Student Loans: Add the total amount owed for educational debt.
Credit Card Debt: Include any unpaid balances if you don’t pay them off in full each month.
Other Debts: This could include personal loans or other financial obligations.
Calculating Your Net Worth
Once you have all your assets and liabilities listed, subtract the total liabilities from the total assets. The result is your net worth.
Example:
Assets: $500,000 (home, savings, retirement, investments)
Liabilities: $200,000 (mortgage, car loan, credit card debt)
Net Worth: $500,000 - $200,000 = $300,000
If your assets exceed your liabilities, you have a positive net worth. If not, your net worth is negative.
How Often Should You Calculate Your Net Worth?
I recommend updating your net worth calculation on a consistent basis, whether that’s monthly or quarterly. Personally, I find that updating it monthly helps me stay closely connected to my financial progress. No matter what schedule you choose, calculate your net worth on or around the same day each period (e.g., the 1st of each month) to ensure you’re comparing like results over time. Regularly checking your net worth keeps you motivated and on track.
Why Net Worth Matters
Monitoring your net worth gives you insight into your overall financial progress. It can help you:
Assess Financial Health: Are you growing your net worth over time?
Plan for the Future: Knowing where you’re starting from and where you want to go helps you plan how your net worth or specific asset buckets should grow to reach your goals, like saving for a home down payment or retirement.
Concentration Risk and Goal Alignment: Ensure your net worth isn’t overly concentrated in one area (e.g., cash, real estate, or company stock), and confirm that your asset allocation aligns with your goals.
Identify Problem Areas: A consistent drop in net worth can signal that it’s time to reassess your spending or debt management strategies.
Get Started
If you haven’t calculated your net worth yet, take an hour to gather your financial data and give it a try. Then, update your sheet on a consistent basis, whether monthly or quarterly, and remember to check your net worth on the same day of each period (e.g., first day of each month). Start now — understanding your net worth is the first step toward getting you where you want to go.