Your net worth is arguably the best way to keep track of your financial progress. Once you know how to calculate your net worth you can use it to help make good financial decisions everyday.
What is your Net Worth
Your net worth in its simplest form is the value of everything you own (assets) minus the value of everything you owe (liabilities). Your net worth is generally displayed on what is called a balance sheet.
Assets – your house, realestate, cash and investments, retirement funds, vehicles and other items of value
Liabilities – Mortgage, car loans, personal loans, credit card debt, student loans and the like.
Net worth is a good indicator of how you are tracking financially. If you sold all your assets to pay for all your liabilities how much money positive or negative you would have.
Calculating your Net Worth
There are many online calculators and tools and software to assist in working out your net worth. Personal Capital offer an excellent free service. There are also many simple excel spread sheets out there such as the following: NetWorthCalculator – free Microsoft net worth template. If you are keen you could create your own customised spread sheet.
Create a list of all your assets
List all your assets and their value such as your house and its current market value. The balance of any savings accounts. The present value of your retirement accounts and investment accounts. The value of cars, motorbikes, boats and the like. I generally would not include any assets below a certain value such as $5000. Ensure that you are listing assets values conservatively in regards to what you could get if you were to sell them. Not necessarily what you think they are worth. Once you have a complete list total up the values.
Create a list of all your liabilities
Go through and list any liabilities you have and the remaining balances owed. Mortgage balance, personal/car loan balances, student loans, credit card balances etc. Once you have completed the list total up the balances.
The easy part… Asset Total – Liability Total = NET WORTH
Now that you know your net worth you have a baseline set and can start to track your progress. If you calculate your net worth on a monthly basis you can easily see how you are progressing. Did your net worth go up or down over the last month? If so what caused it? Be aware that it is common for younger people to have a negative net worth due to large amounts of debt and little time to accumulate assets.
Your ultimate goal towards financial independence is to increase your net worth. This can be done by increasing your assets or decreasing your liabilities. When making financial decision think to yourself, will this make my net worth go up or down in the long run.
Learning how to calculate your net worth is a worth while tool to help you on your way to financial independence. Remember You Can’t Manage What You Can’t Measure! Have you calculated your net worth? Do you have any tools that you would recommend?