Taking Control of Your Financial Health : Calculating your net worth
Net worth is simply a measure of how much a person or a business is worth. Net worth can be a great way to check your financial health and economic status year-on-year. This measure is a total of all your assets without your liabilities. So, when you add up everything you own, you savings and how much you earn (wages, investments, etc.) and then take away all that you owe (including mortgages, credit card debts, student or car loans, etc.), you know how much you are actually worth and how good your financial situation actually is.
The Idea behind calculating your Net Worth
You net worth is like a financial report card – it provides you with a clear snapshot of your financial situation at a point in time. If you were to calculate how much you are worth today, you would be able to see the result of all your hard work – and the result of all that you have spent.
In the short term, this is a wonderful tool to give you either a wake-up call or can make you feel good about being on track with healthy finances. In the long run, it is even more helpful. You can use your year-on-year net worth calculation to see your own progress and use this data to plan for and reach your financial goals.
How to Calculate Net Worth
There are simply 3 steps to calculating your net worth. Steps 1 and 2 take some time and effort, but the result in worth it.
Step 1: Calculate your assets
- List out all your assets and their value. This would mean the current value of your house, your car or any other property that you may own.
- List out all your liquid assets. This includes all your latest bank statements from savings as well as checking accounts, available cash, certificates of deposit or other investments you may have, Individual Retirement Accounts, etc.
- Now list all your personal possessions. You don’t have to itemize everything, just those possessions that are worth more than, say, $500. That is completely your choice. High value personal possessions include items like jewelry, collectors’ items like coin or stamp collections, musical instruments, paintings, etc.
- Once you have converted all of the above into a dollar amount, add it all up together. That is your total asset value.
Step 2: Calculate your liabilities
- Again, start with the cost of your biggest liabilities such as your house mortgage, car loan or any other property loan you may have. List out each liability and how much you currently owe.
- Then, list all your personal debts such as credit card debt, personal loans, student loans, etc.
- Once again, after you have the dollar amount for each of these debts, add them all up together. That is your total liability.
Step 3: Calculate your net worth
- Simply use this simple formula:
Assets – Liabilities = Net worth
The first time you do this exercise, the figure you arrive at is your baseline. This is your foundation for measuring future values.
- Repeat this process once a year. This way, you begin tracking your financial health and it can then become your progress report of how close you are to achieving your financial goals.
How to determine a “target” net worth
While every person’s financial goals and situations are different, it is not easy to have a one-size-fits-all net worth target. Having said that, many people find the following formula a good guide in creating a “target” net worth for themselves:
(Your Age – 25) X (Gross Annual Income/5) = “Target” Net Worth
So, if you are 40 and you earn about $100,000 per year, then you target net worth would be:
(40 – 25) X (100,000/5) = 300,000
So, you should target to have a net worth of about $300,000. This is not a hard and fast rule. This is simply an indication. A lot is dependent on your lifestyle and goals.
You can even use an online net worth calculator if you don’t want to do the numbers yourself. Just make sure you have all the information handy.