Your net worth is a simple indicator of your overall financial health. It’s the total value of everything you own minus the total of all of your debts; that’s it. The higher your net worth, the healthier your financial situation. That number represents how much cash you’d have if you sold off every possession you own, emptied out every account, and paid off every debt.
It’s particularly valuable as a comparison tool with your past and future self, just to see how much financial progress you’re making. Think of your net worth at any given moment as a “snapshot” of your finances. Much like looking through an old photo album, these “snapshots” let you compare how your finances are then versus how they were at different times in your life.
Knowing how to calculate your net worth is the first step in this process, so let’s get started!
How to calculate your net worth in three easy steps
Step 1: Add up your assets
The first step in calculating your net worth is making a list of all of your assets. An asset is anything you have that has significant value. This includes any cash you have on hand, money sitting in accounts, and so on. It also includes your major possessions, like your car or your home. Focus on assets that have significant value. Don’t list everything you own. A good threshold is to focus on assets that you could easily sell for more than $100.
You can get a good estimate of the value of your home by using tools like Zillow, but make sure that the Zillow estimate is realistic. You can get a good estimate of the value of your automobiles by using Kelley Blue Book.
Once you have a list of assets and their values, add up all of those values. That’s the total value of all of your assets.
Step 2: Add up your debts
The next step in calculating your net worth is to make a list of all of your debts. This includes things like your mortgage, your car loans, your student loans, your credit card balances and your payday loans. You should include personal loans on this list — if you owe your aunt $500, include it.
Once you’ve made a list of all of those debts, add them up. That’s how much debt you have in total.
Step 3: Subtract your total debts from your total assets
Now, take your total assets from step one and subtract from that your total debts from step two. The resulting number is your net worth. For example, if you have $100,000 in assets and $20,000 in debts, you’d calculate 100,000 minus 20,000 to get your net worth: $80,000.
Examples of net worth scenarios
Example 1: Steve, the fresh college graduate
Steve is in his early 20s and graduated from college last year. He has a good job, but doesn’t have many assets, just $20,000, mostly tied up in his car.
However, he has a lot of student loan debt ($50,000) and some credit card debt (another $5,000).
Steve’s net worth is negative $35,000. That’s OK. Negative net worth is a pretty common situation among recent college graduates with student debt. Steve has plenty of time to improve his situation, particularly if his college degree is helping him earn a higher salary.
Example 2: Mindy, midway through her career
Mindy is in her early 40s. She’s got a great job and has been contributing to her retirement fund for years, with a balance of $100,000 in there. You go, Mindy! She also has a $20,000 car and a $300,000 condo, along with $10,000 in her checking account. Her assets add up to $430,000.
However, Mindy still owes $200,000 on her condo and $10,000 on her car. Thankfully, she’s left student loans and credit card debts behind, so her debt adds up to $210,000.
Mindy’s net worth is $220,000: $430,000 minus $210,000. That’s a pretty good situation for someone who is mid-career. Ideally, when you’re halfway between college and retirement, you should have a net worth that’s higher than your annual salary, and even better if it’s a lot higher than that.
Example 3 – Terry and Chris, newly retired
Terry and Chris are in their mid 60s. They’re freshly retired. They own their own home and land, with a total value of $500,000. They also have $1 million in retirement, and two vehicles, each worth $25,000. They also have other assets — jewelry, checking account balances, and other items — worth a total of $30,000. The total value of their assets is $1,580,000. They’re in pretty good shape for retirement.
Terry and Chris have little debt. They owe $10,000 on each car and $5,000 in credit card debt, totaling $25,000.
Terry and Chris’s net worth is $1,555,000: $1,580,000 minus $25,000. They’re in pretty good shape for retirement, especially when Social Security kicks in for them.
Track your net worth over time
Now that you know how to calculate your net worth, let’s focus on what it’s useful for: looking at your financial progress over time.
If you get into the habit of recording your net worth somewhere (a Google Sheet is a great place) and do so regularly, you’ll start to see your financial progress over the years. Ideally, your net worth is going up consistently, though it probably won’t be a smooth increase.
Why isn’t it smooth? It’s because life isn’t smooth. There will be times where there are no big unexpected bills or crises, and times where there will be. There will be times when you are careful with your spending, and times when you spend a little more freely. You’ll see those show up in your net worth over time. If things are good, and if you keep a good grip on your spending and debt, your net worth will go up a lot. If you overspend or have unexpected events in life, it won’t go up very much and may even go down.
There are several things you can do to keep your net worth moving in the right direction.
- Be careful with your spending. If you are smart about your monthly bills and use a lot of frugal tactics in your day-to-day life, your spending will go down, and that means more money stays in your pockets. That money that stays in your pockets eventually shows up in your net worth (provided you don’t just spend it elsewhere).
- Pay off your debts. Make a debt repayment plan and execute it. Paying off debts quickly reduces money you’re losing to interest.
- Save for retirement and other big goals. Accumulated money boosts your net worth. The returns you get from investing that money boosts your net worth even faster.
- Be diligent with your career. Move toward higher pay, while keeping your spending from growing along with it.
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