I’ve known plenty of people with high incomes and negative net worth, who live paycheck to paycheck. Rarer but still very real are those who have moderate incomes but still manage to accrue a sizable net worth. Guess who is financially healthier? And guess who doesn’t have to stress about money every day?
There’s a classic saying in business: “If it doesn’t get measured, it doesn’t get managed.” The same is true for personal finance. If you don’t keep track of your net worth, you can’t reliably take action to improve it.
How to calculate your net worth
The formula is simple: Add up your total assets and then subtract your total liabilities. When there’s confusion, it generally comes from defining the terms “assets” and “liabilities.”
Think your assets as any cash or (cash-equivalents) plus anything that you could sell for cash. A common list of assets would be:
- Checking and savings accounts
- Investment accounts (401ks, IRAs, regular taxable accounts)
- Your primary residence
- Other real estate
- Other high-value property such as cars, antiques, art, etc.
Less commonly, you might hold:
- A stake in a private business/partnership
- Private loan notes (where someone owes you interest)
These less common assets can also be harder to value in terms of what they’re worth right now. For instance, a loan might be expected to pay you your investment plus 7% interest over the life of the loan–but if you had to sell it right now, no one would buy it for that total amount.
When you’re adding up assets, it might be tempting to total up the value of any music gear, entertainment gear, power tools, etc that you might have. I tend to leave these out, because typically if you sell it all, it’s not actually going to have a significant impact on your net worth. Remember, the value you can add to your “assets” column is the cash you would get by selling those things, not the total you paid for them. Your stash of power tools is probably worth far less to your net worth than the cost to replace them!
Once you’ve added up your assets, it’s time to subtract the liabilities. A liability is anything that you owe–in other words, your debt. Common liabilities include:
- Credit card debt
- Student loans
- Car loans
- Any other loans that you might have.
Liabilities do NOT included regular payments for services, such as utilities, insurance, or rent.
Once you’ve added up your liabilities and subtracted that total from your assets, you have your net worth. Congratulations! You now have a solid way of tracking your overall financial health, year over year.
Don’t be surprised if your net worth is negative. That’s extremely common. For many Americans, getting to a net worth of $0 is a major milestone. Just set your goal, create a budget, and automate your savings. Stick to your plan and sooner or later you’ll be in the black. Hopefully sooner! That depends on your plan and what you’re willing to do to make changes.
What it’s not:
It’s important to note that your net worth is not the same as your retirement savings. If you have a goal of saving $1 million for retirement, that’s not the same as accruing a $1 million net worth! Why? It’s pretty simple: You’re probably not going to sell every single asset you own in order to retire. At the most basic level, you can’t count your primary residence as part of your retirement savings, because you’ll always need somewhere to live. If you plan on downsizing significantly or moving into a rental, you can budget for that, but even then, it’s typically safest to simply leave out the house when you look at your retirement savings. Your retirement savings is the subset of your net worth that includes only the things that you have saved specifically for retirement.
Net worth calculator
A lot of people like to use online tools like mint.com to automatically calculate their net worth. Others like to do it manually, or are wary of sharing their bank account data with an online tool.
If you’re among the latter, here’s a spreadsheet you can use to get started. It’s a Google sheet. Once you open it, you can choose to save a copy to your own Google Drive account, or download a version that you can use offline.
As always, feel free to ask if you have any questions!