It is extremely important to know your net worth so let’s define it. Investopedia has a definition here, “Net worth is the amount by which assets exceed liabilities. Another way to say this is, it’s the value of everything you own, minus all your debts.” So without getting too technical if you are sitting on your couch with $1,200 bucks but you owe your roommate $500 for rent your net worth is $700. Now, this is an oversimplification to paint the picture, but the point of this exercise is to get a feel for what financial position your in. This can be a painful exercise if you have just exited college as you might have a negative net worth when you count up all the pennies. Do not get discouraged you have to deal with whatever the reality of your personal situation is, and the best part is it will get better if you do something about it today.
There are great resources for learning about how to get out of debt and build wealth, and this website will be one of them. Once you take control of your finances, you are empowered to build the life you want instead of being forced to do whatever you have to in order to pay the bills. So let’s dive into figuring out how to calculate your net worth.
Old School Method
The ole’ pen and paper method is the first way to complete this exercise. Grab a notepad and on one side label the top of the column assets. This column is what helps make your life easier it’s all the things that hold some kind of value. The reason you can list your car as an asset is because if you wanted to, you could sell it and receive cash in return. Same idea behind all the other examples listed below, they all hold some level of value to others, and you can sell them (at various prices) at any given time.
Examples of Assets:
-Stocks and Bond’s
These are all great things to have they all have an underlying value because of the benefits they provide to the holder of them. We won’t go to in detail about each asset type here instead just list out the dollar value for each asset you have. If you have started a 401(k) or IRA at work log on to get your latest balance and write down the total value, same with your bank account balances. If you own a house, look at recent sales in your area of similar properties and use that as it is the best gauge of what you could sell for today. For your car use a site like Kelly Blue Book which factors in where you live and the miles your car has on it. Once you have listed everything you can think of, add up all values to get a total at the bottom of that column.
Now is time for the rough part but it has to be done. On the top right side of the notepad label this side liabilities. This column is what you owe to others for borrowing money at some point in your life. There are many reasons to borrow money in life some good some bad. For most people, unless you come from fortunate circumstances it happens. This article is not to debate debt and how to use it but rather just to get a snapshot of where you stand today. So be honest with yourself and write down anything and everything you can think of that falls into this category, some examples are listed out below. Once you have listed all debt, add up all values to get your liability total.
Examples of Liabilities:
-Credit Card Balance
-Lost Fantasy Football Bets
Now is the final step, and it’s simple, at the bottom of your notepad take the total from the left “asset” column and subtract the right “liability” column.
Assets – Liabilities =Net Worth
This total is your personal net worth. This calculation can get much more complex, but in essence, it’s the same for personal finance or even business finance. Companies do the same calculation on their balance sheets to see the financial health of the business. This is essentially what you are doing seeing the financial health of your personal situation. It is always better to be educated and know where you stand then to ignore your reality.
New School Method
Most people are not looking to bust out their calculator and complete this on paper, and I don’t blame you, in this technology friendly world “there’s an app for that.” My personal favorite is a site called Mint, feel free to check it out. The other one I have heard good things about is Personal Capital similar idea with some different features. These sites make it easy because once you go through the initial set up, it is so easy to check in on things when you need to.
Basically, the site does all the old fashion leg work for you. You will log into a secure connection and connect the app with all of your online accounts, banking information, loans, mortgages, investments and even any monthly bills you may have (i.e. electric, cable/internet, HOA). With your information, all you have to do is refresh the app to get your updated net worth. This makes it easy to check if you have a credit card balance creeping up higher than you wanted it to, or to actually know what your 401(k) balance is after your automatic contributions. It is a great motivator if you are working on paying down debts as you can see them start to disappear. Likewise, it is fantastic when you start investing and see your money making you some money without any work on your part, the true benefit of investing. If you are feeling a little uneasy with this being on your phone, this service is also available on their secure website so you can login in the comfort of your own home. Whatever works for you, it is just important to get a sense of where you stand so you can plan your next step.
So you have your number, and you are either sitting there saying this made me depressed or you are happy with the progress you havmade. The next step is up to you look at what would be most beneficial to your personal circumstances and make a plan of attack. In future articles, I will share my ideas on debt pay down and investing. Use resources to educate yourself and make informed decisions, and you will wake up down the road and see your number moving in the right direction. The choice is yours if you are young you have time on your side use it! If you are older assess your situation and be real with yourself, it is never too late to improve, and this is true in all aspects of life.
What Are Your Thoughts?
• Do you feel it is beneficial to see where you stand?
• How often do you think you should check on your net worth?
• Did you feel more or less motivated if you calculated your net worth for the first time to make a change?
*I have no affiliate programs with anyone mentioned in the article.