Building your personal wealth begins with knowing your net worth.
This value is the cornerstone of everyone’s financial life, but many of us don’t keep track of it, or even know how calculate it. And that’s a shame. Because by knowing this number, you’ll be able to make strategic financial decisions to support your long-term goals (buying a house, saving for the kids’ college, retiring in luxury). It gives you a clear picture of where your finances stand today, and a starting point for measuring your progress as you work toward financial goals.
The math for this calculation is really straightforward. The basic equation for net worth looks like this:
It starts with your assets – everything you own – and subtracts your liabilities – all the money you owe. What’s left over, whether it’s positive or negative, is your net worth. If you own more than you owe, your net worth will be positive. If you owe more than you own, it will be negative – but that’s just a temporary situation.
But before we can get to that, we need to talk more about assets and liabilities.
Every asset you own adds to your net worth. Your assets include things like the cash in your checking account, your investments, your car, your house, and pretty much everything in your house. Acquiring more assets – as long as you don’t use debt to get them – builds up your net worth.
You’ll know the value of some of your assets. Some you’ll have to make a best guess. The key: The asset is worth what you could sell it for today – not what you paid for it when you bought it. Some assets appreciate (grow) in value, like (hopefully) your house and your investments. Others depreciate all the time – your car, your furniture, your stuff. The important thing here is to be realistic with your valuation, so your net worth will have real weight.
Any money you owe, every debt, counts as a liability. Your student loans, mortgage, and credit card debt all work to decrease your net worth. Taking on additional debt drags down your net worth – but paying down debt does just the opposite: less debt means more net worth.
Your exact debt numbers should be pretty easy to pin down. If there are any you’re unsure of, grab the most recent statement you can find and go with that (at least for now).
Once you have all of your asset values and debt balances figured out, the easiest way to calculate your net worth is with a spreadsheet. You can download a free Net Worth Worksheet by clicking here.
Now you have a starting point – your net worth today. And whether it’s positive or negative, there’s so much you can do to help it grow.
When your liabilities outweigh your assets, and your net worth is negative, it’s easy to get discouraged. But you can turn things around, and the best way to do that is to focus on paying down your debt. Not only will reducing debt immediately impact your net worth, it will also save you a lot of money in interest over the long run.
There are several ways to grow your positive net worth, but they all center around investing. One choice: invest in securities like stocks, bonds, and ETFs. Another option is real estate investing, whether you buy actual properties to flip or rent out, or buy into REITs (Real Estate Investment Trusts) or crowd-funded properties (both of those are sort of like stock market investing, but with real estate). The third choice is to invest in yourself and start your own business. Whichever avenue you choose, stay focused on your future financial health, even during downturns and setbacks.
Every three to six months, revisit your net worth. Doing that will help you see clearly which way your net worth is trending (hopefully up), and let you take immediate steps if it’s not moving the way you want.