An important step when taking control of your finances is to know where you stand today.
Know what you have, where you have it and how its working for you.
A net worth calculation is not just for the wealthy; it’s an important financial health check whatever your income level. It's a first step to understanding the assets you own versus the debt that you owe.
With this information, you can start making a plan to grow the assets that you own, while tackling your debt to reduce it for the long term.
How to identify assets versus liabilities
Simply explained, your net worth is the difference between what you own and what you owe. Assets are things which maintain or increase in value while you own them - they can be sold and turned into cash as and when you need to, and you do not lose on the amount you initially invested to acquire them. Liabilities are what you owe, either to another person, or to an organization. Liabilities may be short term or long-term debt, but your goal should be to reduce your liabilities over time and increase your assets.
Ultimately, we want to see you move from negative to positive territory. And if you are already in positive, to teach you how to build on that.
So, what’s the math?
Before we get to the net worth calculation, let’s get familiar with some of the items that fall into each category:
Assets | Liabilities |
Cash Accounts (Bank checking, savings, credit union accounts) | Current Bills |
Investment Accounts (Brokerage account, Mutual Funds account) | Mortgage and Home Equity Loans |
Retirement Accounts (IRA, 401k, Pension plan) | Credit Cards |
Valuable Jewelry, Art, collectables (items of significant value should be appraised to determine the value and insured). | Motor Vehicle Loans |
| Personal & Student Loans |
There are different opinions on whether you should include your home as an asset, but a simple way to consider it is to find out the current market value of your home and deduct what you still owe in mortgage payments. The difference between these two amounts can be considered with your assets. So, if your home’s market value is $300k and you still owe $250k on your mortgage, the remaining $50k can be included in your "assets" calculation.
When it comes to jewelry and collectables, it can be difficult to figure out the current market value. You can simply check out the price that similar items have sold for by doing some online research. This will save you the cost of getting a professional valuation for now.
How to calculate your net worth
Now that you understand the difference between assets versus liabilities you can calculate your own net worth. Create a list on paper or compile the details in an excel file. Either way, make a note of the institutions where these assets or debts are held, the account numbers, or reference numbers and the value of each item.
Now that you have your list, subtract the sum of your liabilities from the sum of your assets.
ASSETS - LIABILITES = YOUR NET WORTH
A positive net worth means that the value of your assets is higher than the amount of debt you owe. You’re in a healthy financial position and you should focus on building your assets and continuing to decrease your debts as far as possible.
A negative net worth means that the amount of debt you owe is higher than the value of your assets. In this case, you need to focus your attention on getting your debts under control, particularly if you've become reliant on debt to meet your day to day living expenses. The good news is that you now have a clear picture of where the debt is coming from, so with support and advice you can work on ways to reduce, consolidate and reassess your spending to cut down on what you owe over time.
Whether your net worth calculation is positive or negative right now, this is just the starting point. Stick with us and join our community - let’s help you on the path to taking control of your finances and building wealth for the long term.
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