Knowing if you’re getting ahead or falling behind with your money can be challenging, but understanding your net worth can be a great way to help you see where you stand. While it might sound intimidating, calculating your net worth is an easy way to see a broad view of your financial situation. Many people focus on one or two areas of their finances but don’t stop to look at the big picture and confirm that they’re moving in the right direction overall.
Periodically calculating your net worth can help you see trends and allow you to make corrections when things start going off track.
What is net worth?
Your net worth is what’s left over after you combine all of your assets and subtract your combined liabilities.
Your net worth can be positive or negative, or your assets and debt might equal each other, making your net worth zero. You generally want it to be as high as possible, meaning that your assets exceed any debt or liabilities you carry.
If your net worth is:
- Positive: It means that the value of your assets is more than what you owe to lenders or creditors. You are covering all your debt and still have some leftover as a cushion for emergencies or to save and invest. A positive net worth is a sign of financial health; the higher your number, the better you’re doing.
- Negative: If your debt exceeds your total assets, you have a negative net worth and don’t have a financial cushion for emergencies. You may be spending more than you earn and using credit cards to help you cover expenses.
- Zero: If you add up all of your assets and liabilities and come up with zero, you are balancing debt and income. You don’t have any left for emergencies, but you aren’t spending more than you earn. A zero net worth is going in the right direction, but you still likely need to reduce your expenses or make more to prepare for the future.
If you have a zero or negative net worth, don’t panic. Spend some time brainstorming ways to cut expenses and earn more, but also be patient with yourself. Remember: This is just a snapshot of your finances and not an indication of your value as a person.
How to calculate net worth
To calculate your net worth, you need to know what you have and what you owe.
What are my assets?
Your assets are items that provide value to your financial picture. Your assets can be liquid (like cash or your checking account) or illiquid (like your car, jewelry or home) as long as you can sell them if needed.
Create a list of your financial and physical assets. Add a rough estimate of each item’s value, trying to get as close as possible to the actual value. When in doubt, be conservative. You’re trying to get an accurate financial picture, which you can’t do if you overestimate what you have.
Personal assets generally include the following:
- Cash
- Checking and savings accounts
- Savings bonds
- Stocks and other investments
- Certificates of Deposit (CDs)
- College savings plans
- Your 401(k) and other retirement accounts
- The cash value of any life insurance policies
- Vehicles (cars, trucks, RVs, boats, etc.)
- The current value of any houses or real estate you own
- Jewelry
- Antiques
- Electronics
- Furniture
- Appliances
While many of your possessions may have been expensive or hold sentimental value, only include items you can sell for cash if you are in a difficult situation.
What are my liabilities?
Liabilities are debts you owe others, like a loan or a balance on a credit card. To calculate your total financial liability, create a second list and assign a value to each line.
Your liabilities may include the following:
- Credit card balances
- Store card balances
- Auto loans
- Student loans
- Mortgages
- Monthly bills (like utilities, phone or other services)
- Medical or dental bills
- Cash loans you owe to others
- Home equity loans
- Other lines of credit
Do the math
Once you have your asset and liability numbers, calculate your net worth by subtracting the liabilities from the assets. It will look like this:
Assets – Liabilities = Net Worth.
For example, if your assets equal $10,000 and your liabilities are $5,000, you have a positive net worth of $5,000 ($10,000 – $5,000 = $5,000).
Alternatively, if your assets are $10,000 and your liabilities are $20,000, you have a negative net worth of -$10,000 ($10,000 – $20,000 = -$10,000).
You can do the exercise on paper, in a spreadsheet or by using an online calculator. There are many available, like the FDIC’s net worth calculator, that will help add up each column and do the math for you.
Calculate your net worth once or twice a year. If you find the changes motivating, you may want to calculate it quarterly, or even monthly. It’s also a good idea to check it if you’ve made a big debt payment or had a significant increase to your savings or retirement accounts.
Consider making adjustments or improvements to your strategy that could help you progress faster. As you experiment with possibilities like increasing your debt payoff or adding to your savings, see how that affects your net worth and if you want to continue.
Why do I need to calculate my net worth?
Calculating your net worth is an excellent way to judge your current financial situation.
Although many people focus on their salary as an indication of financial health, your paycheck doesn’t tell the whole story. While someone makes a lot of money, they may spend more than they earn and have a lot of debt. Alternatively, you may not make much but have no debt and save a large portion of your income, increasing your net worth faster.
Understanding your net worth can help you:
Prepare for financial emergencies: The higher your net worth, the more likely you are to better handle the ups and downs of life. A high-net-worth individual is more likely to have the resources available to handle a layoff or take a leave of absence from work.
Use your money strategically: Putting your money to its best use is a lot easier once you know where you stand. For example, maybe you’re working diligently to save in a high-yield savings account and you have credit card debt. Chances are you’re paying much more in interest on your debt than you’re earning from even the best savings account. While it’s a good idea to build an emergency fund, using extra cash to pay off your debt can help you save money and improve your net worth in the long run.
Save and invest more: Many people want to save more for the future but aren’t sure how to do it. Understanding your net worth can help you see what you’re already saving and encourage you to save more.
Bottom line
Understanding your net worth, and the big-picture view of your finances it provides, can make a significant difference in how you handle your money day to day. It can be tempting to hide from debt or tell yourself that your high salary means you’re doing OK. But knowing it can help you make faster progress toward your goals.
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