There are numerous ways to gauge your overall financial health: a monthly budget, total savings, income level. However, one particularly helpful measurement is net worth. Learning how to calculate net worth can provide a detailed picture of your personal or business finances, and reveal potential areas for growth.
The formula for calculating net worth is simple enough, but understanding how to apply it to your finances can take some time. Read through the following guide before attempting to determine your net worth. It should leave you with a better understanding of what to look for when calculating net worth, and what to do once you have a number.
What Is Net Worth?
Net worth is the value of a person or corporation’s total assets, minus their total liabilities. Within the net worth formula, assets are anything you own with a monetary value. Common examples are properties, collectibles, or any money you have in the bank. Liabilities, on the other hand, are anything that subtracts from your total wealth or assets. This could include loans, a mortgage, or consumer debts. Investopedia puts it simply by saying net worth shows, “the difference between what you own and what you owe.”
Following the net worth formula, you can either end up with a positive or negative value. A positive net worth, no matter how low the number seems, indicates that you own more than your current outstanding debts. Negative net worth shows that your debts are higher than the value of your current assets. This outcome does not always suggest a poor financial situation. For example, your student loans could be higher than the current value of your assets. Remember — net worth is simply your finances at one particular moment in time.
Overall, to improve net worth it is suggested that you pay attention to the relationship between your assets and overall liabilities. If you increase or keep your assets the same while reducing your debt, you can improve your net worth. This is easier said than done, but paying attention to net worth can be a good indicator of your financial progress. It is not uncommon for investors to periodically calculate net worth as a way to determine their financial gains. This method could be adapted by anyone as a way to do the same — just remember to be consistent with your calculations.
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What Can Net Worth Tell You?
Net worth can tell you exactly how much you own after considering your debts. Essentially, this is a glimpse into your financial health at a given point in time. Given that — net worth is often most helpful when tracked over longer periods. By calculating your net worth periodically, you can regularly compare how your finances are doing (and if they are improving). This can be done at whatever frequency you find most appropriate for your financial goals, such as every six months or year.
It is interesting to note that net worth can be applied not only to personal finance but also to corporations and even countries. Learning how to calculate the net worth of a company or country will still provide a look at their financial health, though the effects of the number can be somewhat different.
Personal Net Worth
The first time you calculate your personal net worth — it will often reveal what you already know. For example, if you recently finished college you may have a negative net worth as a result of low savings and high student loan debt. This likely will not be a surprise — but it can be a good jumping-off point for your future financial goals.
By learning to calculate your net worth, you can monitor increases and decreases in the value of your assets. Monitoring these changes over time will allow you to track how much debt you are paying off, how much your assets are appreciating, and more. This will provide an idea of how your financial decisions are playing out — and how you can improve.
Understanding your net worth can set you up to accomplish your short and long-term financial goals. Try to keep in mind throughout this process that there is not a standard number to aim for. Often the best net worth will be decided in relation to your previous values. As you look at your assets and liabilities remember that adjustments can always be made, and there are other metrics you can use to supplement this value when looking at your finances.
Net Worth Of Your Business
Net worth is often referred to as book value in the business world and is monitored using a balance sheet. A balance sheet will report on the total value of assets and liabilities, and will also include a section for shareholder equity (though this variable is not accounted for in the net worth). Profitable businesses will be able to report an increasing net worth, as long as said profits are not entirely distributed to shareholders. This metric can then be evaluated by potential lenders or investors when deciding whether or not to work with that business. In many cases, increasing net worth will also lead to an increase in stock prices.
How To Calculate Net Worth
To calculate net worth, you will need to take stock of anything you have that would be considered an asset or liability. This means totaling up the value of everything you own, as well as adding together any outstanding debts. This is often the most challenging step in the process, as it can take time to uncover each aspect of your current finances. I recommend writing these figures down in an itemized spreadsheet. That way you can be sure everything is accounted for. Once you have this information, the formula to calculate net worth is simply:
The net worth formula will present you with a specific monetary value, which is considered to be your net worth. Make sure you take time to determine exactly which items to classify as assets and liabilities before getting started to ensure you have the most accurate number.
What Qualifies As An Asset Or Liability?
It can be a little confusing to look at what actually qualifies when calculating net worth. That’s because most people don’t think in terms of assets and liabilities. However, the classification is not as difficult as it may seem. First, assets are generally considered to be anything you own of monetary value. As I mentioned above, this includes:
Stocks or Other Investments
Checkings and Savings Accounts
Note that your regular income is not included when calculating net worth. Instead, only the money you currently have in your possession will count towards this number. Keep this in mind as you work through the net worth formula.
Alternatively, liability is simply another way to say debt — and that’s the last thing you need to finish the net worth formula. More often than not, you are already going to be familiar with these amounts as you are likely making monthly payments. With that in mind, liabilities can include:
Credit Card Balances
Unpaid Medical Bills
Any outstanding loans you have are another thing to keep in mind when determining assets and liabilities. In these cases, the equity you have would be considered an asset while the remaining loan balance would fall into liabilities. For example, if you have paid off $35,000 of your mortgage but still owe $200,000 then the $35,000 could be classified as an asset while the outstanding $200,000 would be a liability. Now, this does leave a gap for property appreciation — as there is no place to include whether or not the current market value has gone up. If you do decide to take this into account when determining personal net worth, just make sure you are consistent with your calculations over time.
Example Of Net Worth Formula
An example may help to better illustrate how to calculate your net worth. Let’s say Wylie owns the following assets:
A house valued at $215,000
Investments totaling $10,000
Savings of $20,000
A car valued at $15,000
He also has the following liabilities (or debts):
Student loan debt of $40,000
An outstanding home loan of $150,000
Credit card debt totaling $1,700
Considering each of these factors, the formula to determine Wylies net worth would be:
In this example, Wylie’s net worth ends up at $68,000. If he wanted to increase this value over time, he could focus on paying off some of his debts while increasing his investments and savings values. With the right financial goals, he could see changes in as little as a few months.
Net worth can be a great metric for monitoring your overall financial health. By learning how to calculate net worth you are devoting time to your personal finances — and in turn, putting yourself in a better position to improve. While there is not a standard net worth for you to aim for, it can still be used over time as you aim to meet your short and long-term financial goals. The most important thing to remember during this process is simply to be consistent. Be consistent with your calculations, and be consistent with your schedule for determining net worth. This is the best way to ensure you apply this formula to your finances for the better.
Have you ever tried calculating your net worth? Share any tips you have in the comments below for others hoping to get started.
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