Episode #40: How To Calculate Your Net Worth
Knowing how to calculate your net worth is a really helpful skill to have to keep track of your financial progress over the years. The nature of financial progress is slow and steady, so it’s easy to feel like you’re standing still and not getting anywhere when that is in fact absolutely not true. Think of it like exercising. When you’re diligent and committed, the changes are slow, so unless you track where you started vs where you are now, it can feel like the work you’re doing isn’t making any difference. This is where calculating your net worth comes in to see where you’re at, if you’re on track, and if you need to make any changes to the way you’re managing your finances to work towards your goals.
If you’re either young or just getting started on the journey of learning to manage your finances properly, it’s completely normal for your first few net worth sheets to not look so good. If your net worth is really small, or in the negatives which is also completely normal, don’t panic, don’t beat yourself up. It is what it is, and now you know where you’re starting out so you can set goals, and make changes and adjustments from there.
Defining Net Worth
To make sure we’re all on the same playing field to start this lesson, let’s first talk about what net worth is. The definition of net worth is: the total wealth of an individual, company, or household, taking account of all financial assets and liabilities. Assets are items you have that have a positive cash value, things like bank accounts, or real estate. Liabilities in this context are debts that you have, like student loans, or mortgages. So, the simple calculation to determine your net work is to subtract your liabilities from your assets. The equation itself is simple, but the process of actually figuring out what your assets and liabilities are can be more complicated, so don’t worry if you’re not sure where to start, I’m going to walk you through it all.
First, let’s talk about what can be considered assets. Assets can include more obvious items like your bank accounts, emergency account, and retirement savings accounts, as well as things like cars you own outright and real estate. Some people also hold assets in jewelry, or art, but unless you’re a person who is consciously investing wealth into these items and they have an actual book value like the value you have them insured for, then don’t bother including them in your net worth calculations. On the other side you have your liabilities, which are debts that you owe for example credit card debt, student loans, mortgages, or car payments.
Calculating your net worth
Calculating your net worth can be done in 4 easy steps.
Make a list of all your assets and all your liabilities.
Record the value of each item on your list.
Add together all your assets, then add together all your liabilities.
Subtract your liabilities from your assets to determine the final value of your net worth.
Step #1: Make a list of all your assets and liabilities.
This involves you sitting down and thinking about your own life, but I’m going to give you a list of all the assets and liabilities you may have that you would want to consider for this. You likely won’t have all of the items on these lists, and maybe you’ll even think of some other ones that are specific to your life, but this should get you started. Potential assets you may have include: Your chequing and saving bank accounts, your retirement accounts, investment accounts and the value of the investments you hold within those, your insurance policies depending on what type of insurance you have, the blue book value of your car, the equity you already have in your home, physical cash, your cryptocurrency wallet if you invest in that, and physical property that you own of value like jewelry or art. Take a moment to think about this, see if you can come up with any other assets that are unique to you and your situation that you can add to this list, then move on to the liabilities. Potential liabilities that you might have include credit card debt, mortgages, personal loans, car payments, student loans, and taxes owing. Again take a minute to think about whether or not you personally have any other debts that are unique to you, and if so, add them to this liabilities list.
Step #2: Record the value of each item on your list.
Once you have your list of assets and liabilities that YOU have in your life, it’s time to find out and record the monetary value of each of these items. Some of these will be easy to look up, for example checking your bank accounts and recording the balances in them, and some you’ll need to look up each year like the blue book value of your vehicle as it depreciates over time. The same goes for your liabilities, you should be able to just look most of these up quite easily, maybe you’ll have to look a bit deeper to find your taxes owing or something like that if you fall into that category.
Step #3: Add up the value of all the items on your assets list, and liabilities list.
Hopefully you’ll impress yourself with the value of all your assets added together, and hopefully you won’t freak yourself out with the value of all your liabilities added together, BUT don’t worry if this is this case this is all entirely manageable and remember. To get super dorky on you, knowledge is power and by understanding your assets and liabilities you now have the chance to create a clear road map to manage your finances. So don’t freak out, okay? You’re calm? We can continue on to step number 4? Okay, deep breaths.
Step #4: Subtract your liabilities from your assets.
This will give you the final value of your net worth. And it’s important to remember that while this final net worth number is the summation of where you are in life financially right now, it is not the be all and the end all of how well you’re doing or not doing because this number will vary wildly with big life events like purchasing a home. For example, if you’re saving for a home as a young millennial, you’re saving the down payment for that home. So when you calculate your net worth that year you’ll have a fairly large chunk of positive cash sitting there and making your net worth number appear bigger. The next year you purchase your home because you’ve done really well financially, you’ve demonstrated that you can save money, and the bank has trusted your income earning potential to give you a mortgage. BUT when you add the negative value of that mortgage liability to your net worth calculation, you’re most likely going to find your net worth way down in the negatives. This does not mean that you have bad financial skills and have bad net worth. You’ve just bought a property, that means you’re doing really well, and you now own an appreciating asset that will grow in value over time and add to your overall net worth in the future.
All this to say, while it’s important to do this net worth calculation, it’s more important to pay attention to the parts that make the whole. Yes calculate that final number, but pay attention to how your retirement accounts are growing, how your investments are doing, how your mortgage is going down and you’re paying off more and more of the principal value of your home each year because these are the individual goals you can work towards on a daily basis that will make the biggest difference in your life.
When Do You Calculate Your Net Worth?
I personally do a net worth calculation once a year just to keep track of everything, see where I’m at, and keep tabs on my own progress. Partially this helps me see that I am in fact making progress, and it serves as a good reminder to revisit my financial goals and keep working towards them. I usually set aside time in January for this little chore and recommend that you do the same because it’s a good time for reflecting, tracking your progress, and setting new goals.
And it hardly takes any time at all. After the first time when I needed to set it all up, it now takes me under an hour to find all the information, fill it into my excel spreadsheet, and see what my final net worth value is that I’m starting the year at. If you want to save yourself time and just use the net worth calculation spreadsheet that I’ve already created, then you can pick up a copy over on the how to adult school website shop. It comes fully loaded with all the asset and liability categories I could possibly think of, the calculations are loaded into the document so that they happen automatically when you fill in the columns, and it’s really easy to pull this same document out year after year after year and just fill it in the same way all over again so that you can consistently track your net worth and your growth and progress over time.
Before you go, I want to make one more recommendation and that’s to put it in your calendar now to do your net worth calculation at the start of the new year. Set it as a recurring event so that you can do this every January and track your progress consistently over time. After doing this for a few years, it’s pretty great to be able to look at it and see the progress that you’ve been making over time.
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