Many of us wonder what we are worth. I’m not talking about what we’re worth as people, which is an entirely different concept. I’m talking about what we are worth in monetary terms.
In most cases, this is a fairly simple exercise. Net worth is determined by subtracting your liabilities from your assets at a specific moment in time. If you have more assets than liabilities, you have a positive net worth. If your liabilities overwhelm your assets, your net worth is negative.
The goal is to work towards a positive net worth, which indicates that you can pay off all your debts if you need to, or you’re already debt-free. In this way, net worth can be one measure of your financial health and well-being.
How to Determine Your Net Worth
Determining your net worth is fairly straightforward. You list and add up all your assets and all your liabilities. Then, you subtract your liabilities from your assets. Since determining your net worth is similar to taking a financial snapshot, you don’t consider your annual income, but rather how much money you have “in the bank” right now. If you want your net worth to be higher, calculate it immediately after you deposit your paycheck.
Your assets can be defined as everything you own that has monetary value. They may be liquid like a checking account or non-liquid like your home. If an asset is liquid, it simply means you don’t have to sell it first to realize its monetary value. A few general examples of assets are:
- The market value of your home.
- The market value of your vehicles.
- The money in your investment accounts (including your retirement accounts and life insurance contracts).
- The amount you have in your checking and savings accounts, including CDs and money market accounts.
- Notable items of value you own, such as artwork, furniture, fine jewelry, or collectibles.
Since items like artwork and jewelry can be highly subjective, only include them as assets if you have had them professionally appraised or have a good sense of what someone would pay for them in today’s market.
Liabilities, unlike assets, represent a drain on your resources. These are obligations you have to pay. Your total liabilities aren’t determined by monthly payments owed, but rather by the entire debt you owe. Examples of liabilities include:
- Car loans
- Credit cards
- Student loans
- Outstanding medical bills
- Back taxes
- Liens and judgments against you
Many people find that they have a negative net worth, thanks mainly to their mortgage debt and car loans. Credit card debt and student loans also have a big impact on your overall net worth. Case in point, the student loans my husband and I have are a big reason why our net worth is negative right now.
Calculating Your Net Worth
Once you’ve listed all your assets and liabilities, you can calculate your net worth by subtracting your liabilities from your assets. Here is an example:
- Home market value: $180,000
- Vehicle 1 market value: $2,000
- Vehicle 2 market value: $15,000
- IRA: $7,000
- 401k: $11,000
- Other investment accounts: $5,000
- Emergency fund: $4,500
- Short-term savings: $1,000
- Checking: $2,000
- Other bank accounts: $2,000
Total Assets: $229,500
- Mortgage: $184,000
- Vehicle 2 loan: $10,000
- Total credit card balances: $1,000
- Student loans: $60,000
Total Liabilities: $255,000
Net Worth = $229,500 – $255,000 = -25,500
The net worth here is negative; this person owes $25,500 more than he or she is “worth” in monetary terms.
Improving Your Finances with the Help of Net Worth
Your net worth is a snapshot of where you are at financially. It doesn’t offer information about cash flow, or your monthly income and expenses. But it does provide insight regarding how well you’re accomplishing your long-term financial goals. Once you determine your net worth, you can more easily see what items are holding you back.
In the example above, it appears that the home has decreased in value, so the market value is less than what the homeowner owes on the loan. Hopefully that situation will be remedied by a recovering housing market.
Additionally, student loans are a big liability for this person. Perhaps examining the monthly budget more closely might yield areas to cut back in, and thereby free up funds to devote to extra mortgage payments, student loan payments, or additional investments that could offset debts in a net worth calculation. Or, it could make sense to earn additional income via passive investing strategies to help pay down the debt.
A look at the net worth statement also reveals that the less valuable of the cars is paid off, and, if sold, could actually eliminate what remains of the credit card debt. These kinds of observations can help you as you formulate a plan to improve your finances and strive for positive net worth.
Tracking Your Net Worth
Every time you take this “snapshot,” look at the progress you’ve made. Figure your net worth on the same day of each month or each quarter. By doing it at the same time, you can make sure you are comparing apples to apples and can make use of the results. Why? The patterns of your monthly budget will interfere. You might have more money at the beginning of one month from a paycheck just received than you had at the middle of another month after it was spent paying bills. Instead of getting a true measure of your progress, you end up with a skewed result that can’t help you assess your overall financial situation.
Designate one specific day every month or quarter as your “net worth day.” Track and record your net worth over time (you can eventually graph it) or use a free tool like Mint.com. This practice can be used to regularly gauge your financial health and make sure you’re on track to meet your goals.
Regularly calculating and tracking net worth is just one important item in your financial toolbox. Complement net worth check ups with budget analysis and tracking software, and have a financial plan in place that incorporates short-term and long-term financial goals like buying a home and retirement. Make a budget to accomplish these goals and utilize net worth checkups to make sure you’re on track to meet them.
Remember that net worth, while a valuable indicator, does not give you the depth of information you need to fully assess your financial situation. Someone who has a lot of low-interest student loan debt, for example, may be in a far better financial situation than someone with half as much high interest credit card debt, though their relative net worths may indicate otherwise.
Do you know what your net worth is? How are you using this number to track and improve your financial health?