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Do You Know Your Net Worth?
Very simply, your net worth is all of your assets minus all of your liabilities. This can be calculated for a business or a person/family.
In personal finance, if you want to calculate your net worth, make a list of all your assets and their current market value, and add them all up. Everything you own. Then do the same for all your liabilities.
Plug them into this equation:
Net Worth = Assets – Liabilities
Figuring it out
I think there’s value in writing everything out and seeing it all on paper (or in an excel spreadsheet on your computer screen, if you prefer).
If you don’t agree and want to skip to the automated way, Personal Capital is my favorite net worth/big picture finance platform. You can read about why it’s my favorite here, and there’s more about Personal Capital at the end of this post.
- checking accounts
- savings accounts
- real estate
There are so many possibilities for this list. If you want to get into the weeds, you can start adding up your personal belongings. Your clothes, furniture, TVs, etc. We personally don’t do that because it’s extremely tedious, quite subjective, and a giant pain in the butt that offers you very little after a lot of work. Not a great use of your time.
My recommendation: include your house (if you own it), not the stuff inside your house.
When you’re assigning values to your assets, it’s imperative that you use the current fair market value, NOT what you paid for it.
The number you need to use is the actual number you could sell it for and be paid cash right now. Not what you think it’s worth, or what you paid for it, or what you’d like to get for it.
We’re talking about objective, cold hard cash here. Leave your emotions out of it.
Chris and I don’t include our cars in our net worth number either. We can get a ballpark value fairly quickly thanks to the internet, but they’re both paid off and depreciating assets.
Yes, unless it’s a classic worth a ton of money, your car is a depreciating asset. Rarely is this not true, don’t let anyone, or yourself, convince you otherwise.
Barring an unforeseen extremely extenuating circumstance, we’ll drive both of the cars we own right now until they die.
We don’t plan to sell them for anything significant before they’re worth next to nothing, so including them in our overall net worth doesn’t really add much for us, and doesn’t move the overall needle that much anyway. We don’t have a pair of Ferraris in our driveway…
In short- it’s not worth, to us, the extra time and effort it would take, even if it’s just a little bit.
Now that you’ve got the fun part out of the way, it’s time for the less fun part.
Do the same thing for your liabilities that you did for your assets.
Make a list of anything and everything that you owe.
- car loan
- credit card debt
- student loans
- back taxes
- your kids’ braces
- the couch you financed
Any and all debt of any kind. “Good” debt and “bad” debt. All of it, all in one place, all added together.
If you don’t include the value of your car in your assets column, but it’s not paid off and you have a car loan, you must include the balance on the car loan in your liabilities column. You don’t get the same choice here. Womp womp.
If you own your house, include the current market value of your house in the asset column, and you must also include the mortgage balance in your liabilities column.
This includes the equity of your home in your net worth calculation, but not the entire value since you still owe the bank some money.
If you own your home free and clear then first, congratulations, that’s freaking awesome, and second, then you have no mortgage for the liability column and the whole value of your home is part of your net worth. Hashtag nailed it.
Now that you have all your assets and all your liabilities added up and you have two nice numbers, subtract your liabilities from your assets.
Assets – Liabilities = Net Worth
It’s really that simple.
It’s like when you’re trying to lose weight and it comes down to the math: calories in minus calories out. The math is so straight forward your third-grader could do it for you.
There’s a whole mess of drama in our heads surrounding the math. With money and calories and so many other things. But when you boil it all the way down to just the objective facts, the math is quite straight forward. It’s almost a little bit scary.
Now that you’ve solved this lovely equation, you now know your net worth. Congrats! Knowing is the first step, regardless of what the final destination may be.
What does it mean?
This number represents how much wealth is truly yours, what you actually own.
Going back to those basic subtraction rules… if your assets number is greater than your liabilities number, you have a positive net worth. This is good news!
If your liabilities number is bigger than your assets number, your net worth will be negative. Unfortunately, you can’t just switch them around to get a positive number. Wouldn’t that be nice?
The most important part of all of this is to not beat yourself up about your net worth.
Maybe it’s positive, but not as big as you thought it was. Maybe it’s negative and you have more debt than you realized.
Either way, beating yourself up about it serves exactly no purpose. It won’t change a darn thing and you’ll feel like garbage on top of it. So just skip that part. Seriously.
If you are happy with the number that’s great!!
If want to change it, now you have the starting point and can adjust your course as necessary to arrive at your desired endpoint. You can make a plan and follow the path you want to with intention, instead of wandering aimlessly and hoping you get lucky and land in the place you want.
Here’s some more good news: if you want to learn to pay off debt, save more money, earn more money, work towards financial freedom, and improve your overall financial situation, you’re in the right place!
You’ve got the list and the numbers and your net worth all figured out now. You know how to calculate it and now know where you’re starting from.
(Or you don’t and you skipped down here from the beginning, and that’s ok too.)
Know what’s easier than manually having to update it all the time? If there was an app for that.
Surprise! There is. There are a bunch actually, but Personal Capital is definitely my favorite. Oh, it’s also totally F-R-E-E. You’re welcome.
If you want to have your real-time net worth at your fingertips, plus a bunch of other awesome tools (for FREE), it’s quite simple. Open an account, link all of your money stuff: savings account, checking account, investment accounts, mortgage, home value, car loan, credit card balances, etc. and it does all the work for you.
If you made the list and figured out your net worth manually the first time, now you have a nice list to refer to as you’re entering all of your details, making sure you don’t forget any and have an accurate net worth picture.
Why am I bothering with this again?
There is so much power to be gained by knowing where you stand financially. Even if it’s not exactly where you want to be right now, knowing where you are gives you the ability to walk (or run, or crawl) intentionally in the direction you want to go.
So you can get to where you want to be, instead of wandering aimlessly.
You don’t get in your car without knowing where you’re going. If you don’t know how to get there you turn on your GPS so you arrive at your desired destination.
You have to know where you’re starting for your GPS to work, to know how to get to your desired destination.