In order to have a complete picture of your current financial status at any given moment, it’s important to know what your personal net worth is. Serving as a snapshot of your financial health, tracking your net worth is the best way to understand how you’re progressing toward your financial goals. With this piece of data, you can make decisions about how to adjust your spending, saving, and other financial activities in order to progress toward your goals and reach financial stability.
In this article, we’ll define net worth, explain its importance, and show you how you can calculate your own net worth.
What is Personal Net Worth?
You’ve probably heard the term “net worth” before, maybe in the context of the net worth of a celebrity, CEO, or other wealthy people. But the reality is that we all have a personal net worth regardless of our income.
In the simplest terms, your personal net worth is the amount of money that you actually have to your name. It is the difference between your total assets, or the total items of economic value that belong to you, and your total liabilities, or the combined debts and obligations that you owe to outside parties.
So let’s say that your total assets, including the money you have in your bank account, your savings and investments, and the property you own, come out to $200,000. However, your total liabilities, including your credit card debt and the amount of money you owe in student loans, come out to $50,000. This means that your net worth is $150,000.
In order to increase your net worth, you can either increase your total assets, decrease your total liabilities, or, ideally, do both at the same time.
How is Personal Net Worth Used?
If you want to evaluate your current financial status and make decisions about how to work toward your financial goals, calculating your personal net worth is an invaluable tool. It can serve as a wake-up call that your financial situation isn’t quite as solid as you thought it was, or otherwise it might prove to you that you are on track toward your financial goals. Either way, it’s the best way to get a meaningful view of your finances.
Calculating Your Personal Net Worth
As long as you have accurate records of your assets and liabilities as they stand, calculating your net worth is easy. In a spreadsheet, on paper, or using an online tool, start by adding up all of your assets. This can include:
- Bank accounts
- Investment accounts
- Retirement accounts
- Real estate
- Personal assets like cars, art, and jewelry
The next step is to do the same with your liabilities, which might include:
- Credit card debt
- Student loans
- Personal loans
- Auto loans
- Other liabilities like debt to family, medical, debt, and IRS liabilities
Once you have your total assets and total liabilities calculated, subtract your liabilities from your assets. The result is your personal net worth. Redoing this calculation once every quarter is a worthwhile, smart, and financially healthy habit.