Net worth is the value of everything you own, meaning your financial and non-financial assets, minus your total outstanding liabilities (your debts).
Your net worth can act as an indicator of your financial health, and there are several ways to measure this useful metric.
What Is Net Worth?
Your net worth is essentially a grand total of all your assets minus your liabilities. In other words, your net worth is the figure you get when you add up everything you own from the value of your home to the cash in your bank account and then subtract from that the value of all of your debts which may include a mortgage, car or student loans, or even credit card balances.
If you're wondering what your net worth is, learn how to calculate and interpret it.
How Does Net Worth Work?
Theoretically, your net worth is the value in cash you would have if you were to sell everything you own and paid off all of your debts. In some cases, this number is actually negative, which indicates that you carry more in liabilities than in assets.
While this is not an ideal situation, it is very common for people just out of college or starting their careers. In that case, your net worth is also a measure of how much debt you would still owe if you emptied your bank accounts and sold everything you own to put toward your debt.
Though neither is a realistic scenario, what your net worth measures is more important than the (generally unrealistic) assumptions that are made to get to that number.
In fact, when it comes to your financial health, there is no ubiquitous magic net worth number you should be striving for. But, you should use your net worth to track your progress from year to year and to hopefully see it improve and grow over time.
How to Calculate Your Net Worth
Calculating your net worth can be a simple process, but it requires that you gather all the information surrounding your current assets and liabilities. Most financial planners recommend that their clients keep a secure folder with information on all financial assets and liabilities to be updated at least once a year.
Gathering and organizing this information can be a bit of a chore at first, but ensures that you (and anyone else who might need it like your spouse or financial advisor) have access to the information when needed.
Though such a folder can be turned into much more, calculating your net worth only requires basic financial information regarding the things you own and the debt that you owe. Here's how to get started:
Calculate Your Assets
- Start by listing your largest assets. For most people, they could include the value of their home, any real estate properties, or vehicles like personal cars or boats. In the case of a business owner, this list would also include the value of their business, which has its own more complicated calculation. Make sure you use accurate estimates of market values in current dollars.
- Next, you'll want to gather your latest statements for your more liquid assets. These assets include checking and savings accounts, cash, CDs, or other investments such as brokerage accounts or retirement accounts.
- Finally, consider listing other personal items that may be of value. These could include valuable jewelry, coin collections, musical instruments, heirlooms, or a rare wine collection. You don't need to itemize everything, but you can try to list items that are worth $500 or more.
- Now, take all of the assets you have listed in the first three steps and add them together. This number represents your total assets.
Calculate Your Liabilities
- Again, start with the major outstanding liabilities such as the balance on your mortgage or car loans. List these loans and their most current balances.
- Next, list all of your personal liabilities such as any balance on your credit cards, student loans, or any other debt you may owe.
- Now, add up the balances on all of the liabilities you listed above. This number represents your total liabilities.
Calculate Your Net Worth
- To calculate your net worth, simply subtract the total liabilities from the total assets. For this exercise, it doesn't matter how big or how small the number. It doesn't necessarily matter if the number is negative. Your net worth is just a starting point to have something to compare against in the future.
- Repeat this process at least once a year and compare it with the previous year's number. By comparing the two, you can then determine if you are making progress or getting further behind on your goals. You may want to recalculate your net worth more often if you've embarked on an aggressive savings or debt repayment plan.
More About Net Worth
Be conservative with estimates, especially with home and vehicle values. Inflating the value of large assets may look good on paper, but may not paint an accurate picture of your net worth. Consider using a budgeting app that tracks your net worth for you automatically.
Keep liquid savings in high-yield accounts, which can help them grow faster if you're earning a competitive annual percentage yield. Work on debt repayment and consider refinancing or consolidating debts at a lower interest rate to help speed up your debt payoff.
Review your budget to look for areas where you can reduce expenses and allocate more money to either savings or debt repayment. If you have additional money to save, consider maxing out your emergency fund, then maxing out your annual contributions to an individual retirement account.
- Net worth is the total value of your non-financial and financial assets minus any outstanding liabilities.
- There are many ways to calculate your net worth.
- If your debts outweigh your assets, then your net worth could be negative.
- When calculating net worth, you should aim to be conservative with estimates so as to not inflate the resulting value.