Definition and Example of Net Worth
Your net worth is the grand total of all your assets minus your liabilities. In other words, it is the value in cash you would have if you were to sell everything you own and pay off all of your debts.
Your net worth starts with your assets, which are more than just your money. Your assets include:
- Cash in your bank accounts
- Any investments, such as stocks or mutual funds
- The value of your home
- Valuable personal property, such as collectibles or jewelry
From that total value, you subtract the value of all of your debts. They might include:
- A mortgage
- Your car or student loans
- Credit card balances
The final number, your assets minus your debts, is your net worth.
How Does Net Worth Work?
When it comes to your financial health, there is no magic net worth number you should be striving for. Instead, you should use your net worth to track your progress from year to year. The goal should be to see it improve and grow over time.
In some cases, your net worth may be negative. That means you have more debts than assets, which is common for people who are just out of college or starting their careers. If your net worth is a positive number, you have more than you owe.
To calculate your net worth, you need to gather all the information surrounding your current assets and liabilities. Get in the habit of keeping a secure folder with information on all your financial assets and liabilities. You should update these documents at least once a year.
Gathering and organizing this information can be a bit of a chore at first, but having it ensures that you (and anyone else who might need it, like your spouse or a financial advisor) can find it when needed.
Calculate Your Assets
- Large 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.
- Liquid assets: Next, gather the 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.
- Valuable personal property: Finally, consider other personal items that may be of value. They could include valuable jewelry, coin collections, musical instruments, heirlooms, or a rare wine collection. You don't need to itemize everything; try to list items that are worth $500 or more.
- Add: Take everything you listed in the first three steps, and add them together. That number represents your total assets.
Calculate Your Liabilities
- Major debts: 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.
- Personal debts: Next, list all of your personal liabilities, such as any balance on your credit cards, student loans, or personal loans.
- Add: Now, add up the balances on all of the liabilities you listed above. That number represents your total liabilities.
Calculate Your Net Worth
- Subtract: To calculate your net worth, 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 a starting point to have something to compare against in the future.
- Repeat: Repeat this process at least once a year, and compare it with the previous year's number. By comparing the two, you can determine whether you are making financial 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.
Be conservative with estimates, especially with home and vehicle values. Inflating the value of large assets may look good on paper, but it won't paint an accurate picture of your net worth.
- Net worth is the total value of your non-financial and financial assets minus any outstanding liabilities.
- Net worth is most useful when you compare it from year to year to evaluate your financial progress.
- When calculating net worth, you should aim to be conservative with estimates so you don't inflate the results.