Editor’s note: Quorum is not affiliated with any of the companies mentioned in this article and derives no benefit from these businesses for placement in this article.
In all likelihood, you have a good idea how much cash is in your bank account. You also probably keep close track of the outstanding balances on your credit cards and other debts, such as your student loan, mortgage or home equity line of credit (HELOC). It’s even a safe bet that you know your credit score. Why do we pay so much attention to these numbers? They help us assess our financial health and keep our monetary goals on track.
Net worth is another important financial indicator, one that specifically measures your wealth. For that reason, it sometimes gets overlooked on the assumption that wealth only applies to the mega-rich. But that’s not the case. Everyone should know the difference between what you own and what you owe, which is your net worth—another word for your wealth.
How do you calculate your net worth?
With a three-step equation, you can calculate your net worth:
- Step 1: Total up all your assets.
- Step 2: Total up all your debts or liabilities.
- Step 3: Subtract your total liabilities from your total assets to get your net worth.
For example, let’s say your total assets equal $500,000 and your total debts equal $400,000, then your net worth is $100,000. Or you might have $250,000 in total assets and $225,000 in total debts, which equates to a net worth of $25,000.
It’s also possible to have a negative net worth if your total debts exceed your assets. This is not unusual when you’re first starting out in life and have credit card and student loan debt related to your education. But once you know your net worth, you can set goals for increasing it, such as adjusting your budget so that you’re paying down your debt faster or saving more money.
What are your assets?
Basically, anything of value that you own is an asset. To help you capture all of yours for an accurate net worth calculation, think about the things you own in these six categories:
- Liquid assets: In addition to any cash in your personal possession, this includes things that can be easily and quickly converted into cash, such as:
- Checking account balances
- Savings account balances
- The cash value of permanent life insurance policies
- Retirement accounts: Money you or your employer has set aside in tax-advantaged accounts to be used once you retire, such as:
- Traditional or Roth IRAs
- 401(K) plans
- Keogh plans (Retirement accounts used by the self-employed and small businesses)
- Employer pension plans
- Other brokerage and bank accounts: Investment assets, such as:
- Term accounts (similar to a CD, or certificate of deposit)
- Mutual Funds
- Real estate holdings: Any real property that you own, in the form of:
- Your primary residence
- A vacation home
- An investment property
- Shares in a Real Estate Investment Trust (REIT)
- Business ownership: Any shares that you own in a small business or other private company.
- Personal items: This includes other valuables that you own, such as:
- Recreational vehicles (RVs)
- Fine jewelry, e.g., engagement and wedding rings
When calculating your net worth, you want to capture the account balances of bank and brokerage accounts and the market value of your other assets. If you have an appraisal on your home or other physical assets, you can use that. Otherwise, do a web search for your address, and online real estate sites like Movoto, Realtor.com and Zillow provide an estimate of your home’s current fair market value.
Sites like Consumer Reports, Edmunds and Kelley Blue Book help you value your vehicles. NADA is another site that provides valuations for cars, along with boats and RVs. With art, collectibles and antiques, a web search should help you gauge their value. Err on the conservative side with your market value estimates so as not to overstate your net worth.
What are your liabilities?
To total up your liabilities, determine the outstanding balance on all of your debts, including these common types:
- Credit cards
- Store charge cards
- HELOCs or home equity loans
- Auto loans
- Personal loans
- Student loans
- Outstanding medical bills
- Back taxes
Why should you care about your net worth?
The more attuned you are to your overall financial picture, including your net worth, the easier it is to set and track your personal finance goals. For instance, if your net worth calculation shows that you’re behind on your retirement savings, you can make changes to correct that. If you’re considering a major financial decision, such as buying a new home or remodeling your existing home, knowing your net worth can help you determine if it makes smart money sense.
How often should you calculate your net worth?
Most financial experts recommend setting up a regular schedule for calculating your net worth, such as at the end of every quarter or calendar year. This allows you to see if your net worth is trending up over time, which is the ideal scenario as you pay down debt and save more as your career progresses.