Net worth serves as a crucial financial metric, reflecting an individual’s or entity’s financial health. It’s calculated by subtracting liabilities from assets, offering a snapshot of one’s wealth. Understanding net worth is essential for financial planning, goal setting and evaluating progress toward long-term financial objectives.
What does net worth mean?
Your net worth is simply the value of your assets (the things you own) minus your debts or liabilities (the things you owe). It measures your general financial position and overall wealth.
As a simple example, consider someone with $5,000 in savings, a car worth $7,000, a personal loan debt of $3,000 and no other assets or liabilities.
Their net worth would then be calculated as $5,000 + $7,000 (assets) – $3,000 (liabilities) = $9,000.
How to calculate your net worth
- Make a list of all your assets. Be as thorough as you can. As well as obvious assets like your house and car, include shares, other investments, the amount in your bank accounts, retirement funds, businesses and boats. Include the value of each asset in your list and be as accurate as possible with your estimates.
- Add up the value of all your assets. Use the value of each individual asset to work out the total value of all your assets.
- Make a list of all your debts. Once again, be as thorough as possible, and don’t leave anything out. Include your mortgage, credit card debt, car and personal loans, medical debt, student and business loans and anything else you can think of. Include the amount of each debt.
- Add up the value of your debt. Use the amount of each debt to work out the total amount you owe.
- Subtract. Subtract your total debt from the total value of your assets. The number you get is your net worth.
What should I include when calculating my net worth?
Here are examples of what is classed as an asset and what’s classed as a liability in terms of calculating your net worth.
Assets
- Stocks, bonds and other securities
- Real estate you own (or the portion of the mortgage that you’ve paid off)
- Land you own
- Cars and boats you own
- Money in a checking account or savings account
- The value of a business you own
Liabilities
- Outstanding home loan balance
- Credit card debt
- Student loan debt
- Personal loan debt
- Car loans
- Business loans
Your net worth is, therefore, the amount by which the value of your assets exceeds your liabilities. If this figure is negative, something fairly common for many recent graduates, your net worth reflects how much debt you would still owe even if you sold off all your assets.
Why is net worth important?
Calculating your net worth is a simple and very effective way to determine your financial well-being. Think of it like a health check for your overall financial position. When you work out your net worth, you can gauge how much money you would have left over (or how much money you would owe) if you had to sell all your assets to pay off all your liabilities.
Of course, the reality of net worth isn’t quite that simple. For example, you probably don’t want to consider selling your house to settle debts, while some of your assets, such as an individual retirement account (IRA), can’t be accessed until you reach a certain age. So, your net worth isn’t really a true reflection of how much money you could get your hands on if you cashed in all your assets and paid off any liabilities.
However, while this may make net worth seem a little impractical and even pointless, calculating your net worth is actually an extremely useful exercise. When you know your financial status, you can make informed decisions about your financial future and work to increase your net worth.
For example, if your net worth is calculated as a negative figure, you could look at ways to reduce debt and improve your financial health. If your net worth is positive, you might want to consider a range of investment opportunities that could help you grow your worth even further.
Your net worth is also changing all the time. If you’ve just paid for a two-week overseas holiday or taken out a car loan, your net worth will have taken a hit. But if you’ve paid off your credit cards and made regular deposits into a savings account for the past year, your net worth will be a much more pleasing figure than it was 12 months ago.
Once you understand how your financial decisions affect your net worth, you can start making smarter choices about how you manage your money. And by regularly calculating your net worth and comparing it with past results, you can track your financial performance over time.
What if I have a negative net worth?
In many cases, you may have a negative net worth because you’ve only recently graduated or started working. While you may have run up a substantial student loan debt and also have credit card debt to your name, you probably haven’t had enough time to pay off what you owe.
However, a negative net worth could be an indication that you have borrowed too much money. From mortgages and car loans to personal loans and credit card debt, these large numbers can quickly add up in the liabilities column. And if you don’t own any assets to offset those liabilities, a negative net worth is the result.
If you have a negative net worth, the first step to turning this around is paying down your debts and reducing your liabilities.
What your net worth means for your savings
If you have a negative net worth, your focus may be on paying down debt rather than boosting your savings balance. But, if your current net worth is a substantial positive figure, it may be time to reassess your financial goals.
While a savings plan offers a secure and steady way to boost your finances, other investments, such as property and shares, may offer the potential for higher returns.
How do I improve my net worth?
Here are some steps to consider to improve your net worth.
1. Open a savings account and save money
Open a savings account and contribute to it regularly. You might be surprised just how quickly you can build a substantial balance with a little discipline, and this can have a hugely positive effect on your net worth.
2. Invest your money
Investing your money can help you grow your wealth – if you make the right investment decisions. From shares and property to exchange-traded funds (ETFs) and forex, there are plenty of ways you can invest your money to build a better financial future. If you’re new to share trading, learn how to buy shares online.
3. Cut back on spending
Put together a budget and see where you can cut back on your outgoing expenses. It’ll also help you to reduce frivolous spending and impulse purchases — these will only have a negative effect on your net worth. Make sure you actually need to make a purchase before parting with your hard-earned dollars.
4. Don’t over-borrow
Borrowing large amounts will offset the value of any assets you own, so it’s important that you make sensible decisions when borrowing money. Taking out a large loan or multiple loans can severely impact your finances, so make sure you can comfortably afford to service any loan you apply for.
5. Set a goal
Once you know what your net worth is, you can set yourself a goal. For example, what is your ideal net worth for retirement? Work out a realistic figure and then start to think about what you need to do to make it a reality.
6. Pay off debt
The lower the value of your liabilities, the better your net worth will be. So, regardless of whether you owe money on a credit card or home loan, paying down the amount you owe will reduce your future interest payments and boost your net worth. Setting up a debt payment plan or consolidating all your debt into one loan can help.
7. Calculate net worth regularly
Doing this regularly will allow you to work out exactly how your decisions affect your financial standing and can help you work out whether you are well on your way to achieving your financial goals or if you are straying off course. Keeping your net worth at the front of your mind will ensure you are always thinking of ways to improve it, and it will act as a wake-up call if you need to rethink your money management.
Bottom line
Calculating your net worth allows you to determine your level of financial health and track its improvement over time. Calculate your net worth and start making better financial decisions today.
