What is A Net Worth?
Net worth, simply put, is the total value of what you own minus what you owe. Also known as the total of your Assets minus your Liabilities.
If your savings, investments, value of your home and other assets is larger than your debts and any outstanding amounts owed on mortgages or loans, then you will have a positive net worth. If your debts and loans are higher than your savings and investments, then you will have a negative net worth. When you are younger and coming out of university with student loans, for example, it is likely that you will start with a negative worth. The goal is to break even and then continue to build a positive net worth.
How to Calculate Your Net Worth
First of all, you can calculate your net worth individually or if you are in a relationship, as a couple.
Under assets, you will want to include anything can be made liquid. This will include your checking accounts, savings accounts, retirement funds, property, vehicles. You can also include things of higher value like jewelry or collectibles if you have any. It’s also important to note that you should include the current market value of any assets.
Your liabilities will consist of any debts (consumer, loans), outstanding mortgages or any other values that you owe.
Let’s look at a quick example:
An individual owns a property worth $300,000, an investment account of $200,000 and other assets (e.g. car) valued at $10,000. They have $200,000 left on the mortgage and $5,000 balance on their credit card.
($300,000 + $200,000 + $10,000) – ($200,000 + $5,000) = $305,000
This individual would have a positive net worth of $305,000.
Why You Should Calculate Your Net Worth
In my opinion, there are 3 good reasons as to why you should regularly calculate your net worth:
1. It gives you a holistic view of your overall financial health. You could be making a really good income and bonuses, but if you are spending more than you make, your overall finances will be suffering. This number will give you a sense of that.
2. It helps keep you motivated and accountable. For me, this is the most important one. I get excited to review my net worth and watch it grow. I’m finding as my income is increasing and I increase my investments accordingly, the percentage increase per quarter is growing, which keeps me motivated to stay on track and not increase spending.
3. It can help identify problem areas. Let’s say you do get an increase or a bonus at work and your net worth is not increasing. This might be an indication of lifestyle inflation. If your net worth is not increasing, you can try and pinpoint why that is and improve upon it.
How Often Should you Calculate your Net Worth?
This is solely up to you. I know many people that calculate it monthly and others that do it annually. For me, the right frequency is quarterly. For me, this allows enough time to balance out any short-term market volatility, but also frequent enough that I can review and make adjustments prior to the next quarter. I also find that you can make a significant increase in a quarter which keeps me motivated, whereas monthly the increase is likely not to be as significant.
Your Net Worth is Not Your Self Worth
In personal finance, net worth is typically the number that gets talked about the most. However, it’s important to remember that your net worth is not your self worth. Everyone has a different starting place – some people come from wealthy backgrounds whereas others grew up in lower income households or even poverty. Some have had their parents pay for tuition whereas others come out of university with thousands of dollars of student loans. Some aren’t able to go to college or university and are therefore unable to have the same earning potential. There is still a pay gap between men and women in the workforce. Some people are dealt difficult hands – that could be health or having to support a family member financially or a major emergency that depletes their savings.
It’s important to review your net worth and make sure you are on the right path, but it’s also important to stop comparing yourself to others, ensuring your spending aligns with your values and ensure the life we live is more valuable than a net worth number.
Free Net Worth Tracker
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