“What is my net worth?” It’s a question you should be asking yourself as a new grad. Understanding your net worth – and knowing how to calculate net worth – is one of the most important basics of managing your money.
Here’s how to calculate net worth so you can get a snapshot of your current financial situation and come up with a plan to make it even better.
What is a net worth?
Before learning how to calculate net worth, let’s go over what the term actually means.
Net worth is essentially the value of everything you own (your assets) minus the total of all your debts (your liabilities). It’s a simple way to measure the health of your finances.
Net worth can be a negative or positive figure; the higher your net worth is, the better off you’ll be financially. A consistent increase in net worth is a good sign that you’re managing your money well and growing your wealth.
A decreasing or negative net worth, on the other hand, can signal trouble and that you need to change some habits.
How to calculate net worth
So how is net worth calculated, exactly? Calculating your own net worth is relatively simple, and is easily found by using the following formula.
Total assets – total liabilities = your net worth
For example, a mortgage is considered a liability, but the value of your home is considered an asset. So the net worth of your home is found by taking the value of your home minus the balance of your mortgage.
Here’s how to get an accurate, comprehensive net worth figure for yourself:
1. Add up your assets
Make a list of all your assets, including bank accounts, retirement accounts, investments, any cars, your home and any other property you might own, any valuable art or jewelry you own, and the like. Add up the value of all your assets and write the total.
2. Add up your debts
Next, you’re going to list out all your debts and amounts owed. This includes credit card balances, student loans, personal loans, auto loans, a mortgage, and so forth. Add up the balances of your debts and write this figure down, too.
3. Subtract assets from your debts
To reach either a positive or negative net worth number, you simply take the total of your debts and subtract it from the total of your assets.
Hopefully, you come out to a positive number. But as your financial situation changes, you might encounter a negative net worth. Don’t worry, this is totally normal. The goal is to work towards having a positive net worth through paying off debt, socking away money, and investing for the future.
Why knowing your net worth matters
Keep in mind, your net worth doesn’t make up your entire financial picture. It doesn’t show your cash flow, income, expenses, or spending habits – it’s simply a snapshot of where you stand now and where you’re headed if you continue down this path.
However, it’s still a vital part of managing your money so you can become more proactive about creating a positive net worth.
Here are three reasons why knowing your net worth matters:
1. Offers more financial freedom: Less debt and more savings offers the freedom to be able to make your own choices and not worry whether the bank will approve your loan or allow you to purchase something you’ve been saving for.
2. Provides financial security: The greater your net worth, the easier it will be to overcome financial emergencies and other obstacles. The more cash you have in the bank, the more successful you’ll be at traversing issues like getting laid off or an economic downturn.
3. Allows for risk-taking: A positive net worth allows for more strategic risk-taking, such as changing careers, starting a business, or investing in a particular venture. You’ll have more freedom to pursue your passions without overly worrying about the consequences.
Tracking your net worth
Now that you understand how to calculate your net worth, keep track of it on a monthly or quarterly basis. Keep all of your assets in a spreadsheet so you can consistently update the figures, along with a running total of your debt balances. That way you can easily subtract your assets from your debts to get an updated figure every month.
You can also use a free money management software such as Mint or Personal Capital to automatically calculate your net worth for you every time you log in. Once you link all of your bank accounts, retirement accounts, credit card accounts, and loans, the software will automatically subtract what you own from what you owe and give you an updated net worth.
Improving your net worth
Every time your net worth changes, it either moves in a positive or negative direction. The goal is to improve your net worth over time so you can get out of debt and begin to build wealth. As someone with a positive net worth, you’ll be able to achieve your financial goals sooner and save more money for retirement.
Improving your net worth is not a complicated process, but it is one that will take some time and discipline. Each time you pay off a credit card or pay down your student loans, you increase your net worth. As you pay off debt and continue saving and investing money, the more improved your net worth figure will become.
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