Person calculating net worth at a desk with a notebook, calculator, laptop, and financial documents, surrounded by charts and personal finance books in a cozy, well-lit setting.

What is Net Worth and how to calculate it

/ Creating a plan, Establishing a starting point / By

Achieving financial freedom is a dream for many, but it’s not just about dreaming; it’s about planning and taking action. Whether you’re just starting out, dealing with debt, or already seeing your investments grow, having a plan is crucial. One of the first steps in building this plan is calculating your net worth. This gives you a clear picture of where you stand financially and helps you map out the steps needed to reach your goals. Let’s dive into how you can calculate your net worth and why it’s so important.

Person calculating net worth at a desk with a notebook, calculator, laptop, and financial documents, surrounded by charts and personal finance books in a cozy, well-lit setting.

What is Net Worth

Your net worth is essentially a snapshot of your financial health at any given moment. It’s the difference between what you own (your assets) and what you owe (your liabilities). Think of it as your financial scorecard. Here’s the basic formula:

Net Worth = Total Assets – Total Liabilities

Identifying your assets

Start by listing all your assets. Assets are anything of value that you own. Here are some common categories to consider:

  1. Cash and Cash Equivalents: This includes your checking and savings accounts, as well as any cash you have on hand.
  2. Investments: Include your retirement accounts (like 401(k)s and IRAs), stocks, bonds, mutual funds, crypto, and any other investment vehicles.
  3. Real Estate: This could be your primary home, rental properties, or any other real estate holdings.
  4. Personal Property: Items such as cars, jewelry, art, and other valuables. It’s important to be realistic about their current market value.
  5. Other Assets: Any other valuable items you own, such as collectibles or business interests.

Listing your liabilities

Next, list all your liabilities. Liabilities are debts or obligations you owe to others. Here are common types of liabilities:

  1. Mortgages: The outstanding balance on your home loans.
  2. Student Loans: The remaining balance of any student loans you have.
  3. Auto Loans: The remaining balance of any car loans.
  4. Credit Card Debt: The total amount of credit card balances that you owe.
  5. Personal Loans: Any other loans you’ve taken out.
  6. Other Debts: Include any other debts, such as medical bills or money owed to family or friends.

Calculating your Net Worth

Once you’ve identified all your assets and liabilities, it’s time to do the math. Add up the total value of your assets and the total value of your liabilities, then subtract your liabilities from your assets. The result is your net worth.

For example, let’s say your assets include:

  • Cash: $10,000
  • Investments (401k, HSA, etc.): $50,000
  • Home value: $200,000
  • Car market value: $15,000

Total Assets = $275,000

And your liabilities are:

  • Mortgage: $150,000
  • Student Loans: $20,000
  • Credit Card Debt: $5,000

Total Liabilities = $175,000

Net Worth = Total Assets – Total Liabilities Net Worth = $275,000 – $175,000 = $100,000

It is worthwhile to go through the same exercise but exclude your primary residence as an asset (if you are not renting). Although it is an asset, it is not an asset you can use to generate further returns because you have to live somewhere.

Why knowing your net worth is important

Knowing your net worth gives you a clear understanding of your financial position. It helps you:

  1. Track Progress: By calculating your net worth periodically (quarterly or annually), you can track your financial progress over time.
  2. Set Goals: Whether you want to pay off debt, save for a down payment on a house, or build an emergency fund, knowing your net worth helps you set realistic financial goals.
  3. Make Informed Decisions: Understanding your net worth can guide your financial decisions, such as whether you can afford a major purchase or need to focus on debt reduction.
  4. Plan for the Future: Your net worth can influence your retirement planning and help ensure you’re on the right track to meet your long-term financial goals.

Taking the next steps

Once you’ve calculated your net worth, it’s time to create a plan. Here are a few steps to consider:

  1. Create a Budget: Track your income and expenses to identify areas where you can save money.
  2. Build an Emergency Fund: Aim to save three to six months’ worth of living expenses to cover unexpected costs.
  3. Pay Off Debt: Focus on paying down high-interest debt first, such as credit cards.
  4. Invest for the Future: Start or increase your contributions to retirement accounts and other investment vehicles.
  5. Review and Adjust: Regularly review your net worth and financial plan, making adjustments as needed to stay on track.

Final thoughts

Calculating your net worth is a crucial first step towards financial freedom. It provides a clear picture of your financial situation and helps you make informed decisions about your future. By taking the time to assess where you are now, you can create a roadmap to achieve your financial goals and build a secure, prosperous future. So, grab a pen, a notebook, and start crunching those numbers. Your journey to financial freedom begins today!