One of the ways that you can track your financial progress is to periodically check your net worth. Your net worth is a look at one moment in time as far as your finances are concerned. It provides you with a picture of what your overall financial position is right now. Net worth offers you the chance to see where you stand, allowing you to plan for the future. It can also provide you with a yardstick to see how much progress you have made with your financial life over time.
How to Calculate Your Net Worth
Net worth is a fairly simple calculation. You simply add up all of your assets, and then subtract your liabilities from that number. What you end up with is your net worth.
Before you begin, you need to know the difference between an asset and a liability:
- An asset is something that provides financial value. Assets include tangible items, like your home, as well as intangible items, like stock. Your savings accounts, retirement accounts, valuable collectibles, and other items of value are considered assets.
- A liability is an obligation that you are required to pay. A liability is a drain on your income. Debts are liabilities. Note, too, that while your home might be an asset, your mortgage is a liability.
Now that you know the difference between an asset and a liability, it’s time to calculate your net worth.
Start by adding up all of your assets.
- The market value of your home. You can use Realtor.com or Zillow.com to get an estimate (free).
- The resale value (not what you originally paid) of your car. You can use Edmunds.com to get an estimate (free).
- The value of art or jewelry that has been appraised.
- The value of your checking accounts, savings accounts, and investment accounts (including tax-advantaged retirement accounts).
Next, total all of your liabilities.You aren’t figuring your net worth in terms of income and expenses, so you need to add up the total amount that you owe for each loan, from your mortgage to your car loan to your student loan to your credit card balances.
It’s worth noting that if you have an advanced personal finance application, like Personal Capital (free), you can connect all of your accounts and the calculations will be performed automatically on your behalf.
After you have both of these totals, subtract the liabilities from your assets. You either have
- positive net worth, meaning that your total assets amount to more than your total liabilities, or
- negative net worth, meaning that your debt exceeds your assets.
Right now, I have negative net worth, mainly due to my student loans and mortgage loan. I’ve only had a retirement account for about seven years, and my taxable investment account for four or five years, so that hasn’t been a lot of time to accumulate assets in those accounts even though I make regular contributions.
Using Net Worth to Measure Financial Progress
Net worth is useful for establishing a starting point for your long-term financial plans, as well as for seeing what sort of progress you are making overall with your efforts. However, net worth isn’t a replacement for understanding your cash flow. You still need to know how money moves through your personal economy, and what to expect in terms of income and expenses.
In order to effectively use net worth as a financial measuring stick, you need to figure your net worth at regular intervals. You can figure your net worth each month, each quarter, semiannually, or annually. I like to review my net worth semiannually. My efforts are long-term, focused on building long-term wealth through investing, as well as making regular bi-weekly payments on the mortgage and paying on student loans.
When I check every six months, I can see whether or not the overall picture has improved. Usually, it has. At the rate things are going, I should have positive net worth well before the mortgage is paid off and the student loans are discharged.
Performing a net worth calculation can help you stay on track with your financial goals. You can see how far you’ve come, and get an idea of what’s still left to be done.
Photo credit: Wordle.net.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own blog at Miranda Marquit.