Net Worth: What is it and how do you calculate it?
Net worth is a financial term that refers to the total value of an individual’s or a company’s assets minus their liabilities. In other words, it’s a measure of how much an entity – or person – is worth financially.
How to calculate your net worth
To calculate your net worth you simply add up all the things you own (like cash, investments, your house, and your car) and call that your assets. Then you take all the money you owe (like mortgages, credit card debt, and student loans) and call that your liabilities.
Total Assets – Total Liabilities = Net Worth
To find your net worth, you just subtract your liabilities from your assets. So if you’ve got $50,000 in cash and investments, a house worth $300,000 and a car worth $20,000, your assets would be $370,000. But if you have a mortgage with a balance of $200,000 and credit card debt of $5,000, your liabilities would be $205,000. That means your net worth would be $165,000.
Assets | Liabilities |
---|---|
Cash and cash equivalents (e.g. bank accounts, money market accounts) | Mortgages |
Investment accounts (e.g. brokerage accounts, retirement accounts) | Credit card balances |
Real estate/property (e.g. value of your home, any rental properties) | Student loans |
Personal property (e.g. vehicles, jewelry) | Personal loans |
Businesses | Business debts |
Why is calculating your net worth useful?
Calculating your net worth can be useful for a number of reasons. It can help you to:
- Understand your financial situation: By looking at your net worth, you can get a sense of whether you are financially better or worse off than you thought.
- Set financial goals: Knowing your net worth can help you to set financial goals for yourself. For example, you might want to increase your net worth over time by saving more money or investing in assets that will appreciate in value.
- Monitor your progress: Calculating your net worth at regular intervals (e.g. annually or quarterly) can help you to track your financial progress over time. If your net worth is increasing, it could be a sign that you are managing your finances well and making good financial decisions.
- Identify areas for improvement: If you find that your net worth is not increasing as quickly as you would like, you can use it as a starting point to identify areas where you may be able to make changes to improve your financial situation. For example, you might need to reduce your spending, pay off debt, or invest in higher-yielding assets.
Overall, calculating your net worth can be a useful tool for managing your finances and achieving your financial goals.
What should you do if you have a negative net worth?
If you have a negative net worth, it means that the total value of your liabilities is greater than the total value of your assets. This can be a cause for concern because it means that you have more debt than you have assets to offset it.
If you find that you have a negative net worth, there are a few steps you can take to improve your financial situation:
- Make a budget: Start by creating a budget that outlines your income and expenses. This will help you to understand where your money is going and identify areas where you can cut back on spending.
- Pay off debt: Try to pay off as much debt as you can, starting with the debt that has the highest interest rate. This will help to reduce the amount of interest you are paying and can make a significant impact on your net worth over time.
- Increase your income: Look for ways to increase your income, whether it’s through negotiating a raise at work, taking on additional employment, or starting a side hustle.
- Invest in assets: Consider investing in assets that have the potential to appreciate in value, such as real estate or stocks. This can help to increase your net worth over time.
- Seek professional help: If you are having trouble managing your finances and are unsure of how to move forward, consider seeking the help of a financial advisor or credit counselor. They can provide guidance and help you to create a plan to improve your financial situation.
Although it might feel daunting, it is possible to turn around a negative net worth and improve your financial situation, but it may take time and effort.
How can you increase your net worth?
Once you’ve calculated your net worth, you may decide you want to try and increase it. There are several ways to increase your net worth:
- Save and invest money: One of the most effective ways to increase your net worth is to save and invest money. This can help to grow your assets over time, which in turn will increase your net worth. Consider setting aside money in a high-yield savings account or investing in a mix of stocks, bonds, and other asset classes.
- Pay off debt: Reducing your debt can also increase your net worth. As you pay off loans and credit card balances, your liabilities will decrease, which will increase your net worth.
- Increase your income: Earning more money can also help to increase your net worth. Look for opportunities to earn more through your current job or by taking on additional employment or starting a side hustle.
- Invest in assets: Consider investing in assets that have the potential to appreciate in value, such as real estate or stocks. This can help to increase your net worth over time.
- Reduce your expenses: Cutting back on unnecessary expenses and finding ways to save money can also help to increase your net worth. By spending less and saving more, you can free up more money to put towards paying off debt, saving, or investing.
It may take time to increase your net worth, but by making a plan and sticking to it, you can make good progress towards improving your financial situation.