While the mere practice of calculating your net worth may not instantly improve your financial situation, it might identify the need to save more, or it might actually put you at ease when you consider how far you’ve come and where you want to be as you mature financially.
Most people have no idea what their net worth is or where to begin, so let’s walk through some basics, and you can take it from there! First, let’s define net worth:
Your net worth is the difference between your assets and your liabilities. In other words, it is the value of everything you own, minus any debts you have.
Why Is Net Worth Important?
Your net worth is an important measure of where you stand financially and where you’re headed. A simple math equation showing what you’re worth (assets) when everything you own is balanced with everything you owe (liabilities).
What Is Considered an Asset?
An asset is something with an assigned value. For example, your home is an asset because it can be defined by how much it is worth. A painting your child did, while valuable to you, does not hold value to others and would not be considered an asset.
Assets are often described as either liquid or illiquid. Liquid assets can be converted into cash quickly. Examples of liquid assets include cash, stocks and government bonds. Illiquid assets cannot be changed into cash quickly without substantial loss in value. Houses, antiques and other collectibles are considered illiquid assets.
Here are a few examples of assets:
- Cash on hand
- Savings, bonds, stocks and any other investments
- Value of your home
- Value of your auto
- Retirement savings
- Gold, jewellery and collectibles
- Any stake in a business or guaranteed income
What Is Considered a Liability?
Liabilities refer to being responsible for something, in this case, debt. Liabilities are often categorised as current or long-term. Current liabilities are debts that can be paid off within a year, like a small credit card balance. Long-term liabilities are for much longer, like a mortage.
Here are a few examples of liabilities:
- Loan remaining on your home (to balance out the assumed value above)
- Credit card debt
- Auto loans
- Other loans
How to Calculate Your Net Worth
First, compile a list of your assets and liabilities, including the value of your assets and the balance of your debt. Add up your assets and liabilities independently. Your assets will be a positive number and your liabilities will be a negative number. Simply add the liabilities to the assets and that is your net worth.
Some key things to consider are your age and major life events. If you’re relatively young, your net worth wouldn’t be expected to be very high, and could even be negative. You’re just starting off in life and may be carrying any number of loans from auto to personal loans. However, as you approach retirement, you’d want your net worth to be higher to cover any shortfall in income you’d expect when you’re no longer working. As you reach your thirties and forties, it’s helpful to start monitoring your net worth routinely and try to increase it every year. Things like stock market returns or purchasing a new home may temporarily cause it to dip, but excluding one-time items, you should always be striving to increase your net worth so you can enjoy a comfortable retirement.
If you’d like to explore how you should be saving based on your age, check out our list of good financial habits to start building in your 20s, 30s and 40s.