What is Net Worth

What is Personal Net Worth:

Personal net worth is the value you get when you sum up everything you own, from the market value of your home to your bank balance, and then subtract all of your debts including, personal loans, auto loans, mortgages, and even your credit card balances.

In other words, Your net worth is the number you get if you sell everything you own and repay your total debts. Sometimes, this value might be negative, which means you owe more than what you own, and that’s not an ideal situation.

Personal net worth is a very important indicator of your financial health, and there are several ways to calculate it.

However, as far as your financial health is concerned, there is no specific net worth value you should be aiming for. But it would be best if you calculated your net worth to track your financial situation from year to year and hope to see it grow over time.

How to Calculate Your Net Worth:

Calculating personal net worth can be a simple and easy process. You need to gather all your assets and liabilities information. It’s highly recommended that you keep a secure folder in which all your assets and liabilities are listed and make sure you update this list once a year.

Collecting such information might be a little challenging at first, but you need to ensure that you have easy access to the information when required. Having a secure folder can help calculate your net worth as it requires basic information regarding your assets and liabilities. Here’s how you calculate it:

STEP 1: Calculate Your Assets:

Start with your largest assets. For many people, their largest asset might be the value of their home, cars, or any real estate property. In case you’re a business owner, your largest asset may be the value of your business. Also, make sure you’re using accurate market values of your assets.

The next step is to collect statements of your liquid assets such as CDs, saving accounts, cash, and other investments.
In this step, you’ll need to consider other personal items that may be of value, such as jewelry, stocks invested, musical instruments, coin collections, etc. Make sure you’re listing those items that are worth at least $500.

Next, record any value you lent to someone, and you are expecting it to be paid back to you in the future.

The final step is to add all the assets listed in the first three steps. This figure indicates your total assets.

STEP 2: Calculate Your Liabilities:

This is a similar process to assets calculation. First, you have to gather your major liabilities, such as a car loan or mortgage.

List your liabilities like loans, balance on your credit card, and other debts.

Sum up the values of all the commitments listed above, and the number will indicate your total liabilities.

STEP 3: Calculate Your Net Worth:

Here you’ll only need to subtract the value of total liabilities from total assets to get your net worth. However, it doesn’t matter if the figure is positive or negative. It’s just a starting point to have a figure to compare with in the future.

Make sure you repeat this process twice or at least once a year, and don’t forget to compare it with last year’s number. This will help you determine if you’re making progress or getting further behind your financial goals.

Tracking Your Net Worth:

Now, after you calculated your net worth, you need to start keeping track of it.
Calculate your net worth on the same day of every month or every quarter. Calculating it on the same day ensures you that you’re calculating and comparing accurately.

You might have noticed that you have more money at the beginning of the month compared to the middle or end of the month. So if you calculate your net worth at the beginning of one month and in the middle of another, you might end up with skewed results that would give you misleading information about your financial situation.

A good rule of thumb is choosing a specific day of each month or quarter to track your net worth over time. This can help you improve your financial situation and let you know you’re on track to achieve your goals.