Calculating and tracking your net worth is an important part of managing your finances. Many people avoid calculating their net worth because they think it’s complicated or don’t understand why it’s important and how helpful it can be in managing their finances.
Figuring out your net worth is really easy! It can tell you a lot about your financial situation and helps you understand your financial habits if tracked regularly. Let’s talk about why and how to calculate your net worth!
What is Net Worth?
Net Worth = Assets – Liablities
Your assets include anything you own that has a monetary value. So cash, retirement savings, stocks, bonds, vehicles, houses, and anything else you own that you could sell and make money from.
Your liabilities are anything you owe money on — your debts. This would include student loans, credit card debt, car loans, mortgages, and money you owe to family or friends.
Your net worth basically tells you how much money you would have left if you sold everything you owned and paid it on your debts.
How to Calculate Your Net Worth
To calculate your net worth, you will use the net worth formula I gave you above. I promise it’s pretty simple!
First, list out all your assets and their values. Log into all your accounts and use real numbers! Here’s a guideline of what values to use for each type of asset:
- Cash/Savings Accounts – the balances of your checking and savings accounts, money market accounts, and any cash you have.
- Retirement Accounts – the amount of money you would get if you cashed out your retirement account today.
- Investments – the balance of any investment accounts you have.
- Vehicles – the best and easiest way to get the current value of vehicles is using Kelley Blue Book.
- Personal Property – estimate the value of any personal property you want to include in your net worth (things like jewelry, furniture, electronics, etc.)
- Real estate – you want to use the current market value of any property you own, or what you would be able to sell it for today.
Using estimates is fine, you just want to be pretty close to the actual value of your assets. Consider what you would get out of those items if you sold them/cashed them out to apply that money to debt – this would be the value. Once you have values for all of your assets, you want to total them all up.
Next, list out all your liabilities and their values. This is a little easier — the value of your debts is the amount you would have to pay to clear the debt. Again, I want you to log in to all your accounts and use real numbers! Total up all of your liabilities.
Now subtract your total liabilities number from your total assets number. You just calculated your net worth!
Total Assets – Total Liabilities = Net worth
How to Increase Your Net Worth
If your net worth number is negative, don’t panic! This is extremely normal. The goal is to eventually have a positive net worth, and there is a lot you can do to boost that number.
The main way to increase your net worth is to reduce your debt. Paying off debt will reduce your liabilities, which will start increasing your net worth. Reducing your expenses will also cause an increase. If you spend less money, you will have more cash and savings – this increases your assets. Increasing your income (and not spending the increase) will also increase your net worth.
If you are in the habit of spending more than you make (i.e. using a credit card), you will be consistently decreasing your net worth. Get on a budget, cut your expenses, and start paying off your debt — this will put you on a good path to positive net worth.
Why Knowing Your Net Worth is Important
When you know your net worth, you have an easy overview of your financial situation. It gives you the “big picture” of your finances. Your net worth is affected by every single financial decision you make, so it’s a good benchmark to track your financial progress over time.
Knowing where your net worth stands can be very motivating to make changes to your financial habits. If you go out and spend a bunch of money – your assets (cash) will decrease because that money is now gone, and your net worth will decrease. If you get on a budget and have an extra $1,000 a month you pay to debt – your liabilities will decrease and your net worth will increase. Knowing how these types of decisions affect your net worth can help you change your behaviors so you can move toward your financial goals.
Having a net worth of over $1,000,000 is what makes you a millionaire — not just making $1M. So if you ever want to be a millionaire, start tracking that net worth so you know when you hit that milestone!
How to Track Your Net Worth
I recommend tracking your net worth on a monthly basis. You can use a spreadsheet, pen and paper, or one of the many financial apps out there. Or, you could grab my net worth worksheet and print one out each month!
Calculate your net worth at the end of every month so you can compare it to the rest of the year. This will let you see trends in your net worth over time and give you an idea of what direction you’re going. You’ll be able to adjust your budget accordingly to make sure you are moving towards your financial goals!
When you track your net worth, you’ll be able to easily see the progress you are making.
Whether you are focusing on paying off debt, saving for an emergency fund, or investing to build wealth, you’ll see the increase in your net worth each month. This can help keep you motivated and on track!
When I calculated my net worth for the first time, it made me actually realize how much being in debt affected my finances. I’ve been able to see improvements in my net worth as I’ve focused on paying off debt. One day it’ll be exciting to see that my positive number inch toward $1 million!
Get started today by calculating your net worth with my FREE worksheet, and make the changes needed to push your net worth in the right direction!
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