What is Net Worth? How Do You Calculate Net Worth?
What is it?
Net Worth is a number that is used to indicate your financial position. It is a snapshot of how you are doing economically at any given time.
It is used to measure how you are doing financially at the current time, and is a useful money management tool to compare your financial position over time.
The calculation of is very simple and straight forward:
Net Assets - Net Liabilities = Net Worth
This article will go further into detail about the numbers that go into this calculation, and give you some Millionaire Tips on how to increase your net worth.
The first step in performing the calculation is to make a list of your total assets and your total liabilities. Use the following lists to determine your total assets and your total liabilities.
Make a list of your total assets. These are items that can be sold to provide you with money. These are some assets that you can use in your net worth calculation:
- Savings Account (bank statement)
- Stocks and Mutual Funds (brokerage fund statement)
- CDs and Other Investments
- House(s) (county auditor's tax value)
- Car (Blue Book value)
- Jewelry, Antiques and Collectables
Since it would be impossible to get an actual price of these items without actually selling them, you can try your best to determine the current resale or market value of each of your assets. Try to get the value of these items as of one particular day. In some cases, you may not want to get an appraisal of all of your collectables every year. You can simply estimate based on the last appraisal.
Total up the numbers on this list to get your total assets.
There are things you own that you probably do not want to include in your calculation. They would be too difficult to include because of the quantity, and probably will not bring you a lot of money. Do not include clothing, furnishings, office supplies, household goods, and the like, since they will not hold their value over time.
Net Worth on Amazon
Since most people also have money they owe to others, this amount would have to be paid off before the assets are truly yours. Use the principal balance of these loans instead of the payment amount. Make a list of your total liabilities to include items such as:
- Home Equity Loan
- Student Loans
- Car Loan
- Personal Loans
- Ongoing Credit Card Debt - do not include accounts you pay off every month
Total up these numbers to get your total liabilities.
Calculate Your Net Worth
Once you have determined your total assets and your total liabilities, the calculation for net worth is very easy. Simply subtract your total liabilities from your total assets. The answer is your net worth.
You can do this calculation on a piece of paper, a calculator, a spreadsheet, an online net worth calculator, or on some accounting software.
Analyze Your Net Worth
A positive number means that you have a positive net worth. You are able to meet all of your debts with your assets. You can use your positive number as a comparison over time, to see if you can increase your net worth.
A negative number means that you are not doing as well financially. Remember that this number represents your economic condition, and not your worth as an individual. It simply means that you cannot meet all of your debts with your assets. You will need to work even harder to increase your number, but it is something you can do. Many people have been able to move from a negative net worth into a strong positive position.
Let's take a break to watch a video that recaps what we have learned so far. After the video, we will discuss how to increase your net worth.
How to Increase Your Net Worth
Once they have determined their number, most people want to work towards increasing it. They enjoy seeing this number increase from year to year. How do you increase your net worth? Since there are two factors in the calculation, your total assets and your total liabilities, working on either one can help you increase your net worth. Working on both will help you increase your number even faster.
To increase your net worth, you can increase your assets. When you make decisions on how to prioritize your spending, you can try to spend your money on things that will increase your assets. Instead of buying furniture or a new pair of shoes, for example, you can work on a home improvement, or buy an investment. In this way, your net income becomes an important part of a money management strategy that is sure to help you increase your bottom line.
Another way to increase your net worth is to reduce the amount of money you owe. By paying down the principal of your loans, you will be in a better financial position. You might want to consider living more frugally so you have more money available to pay down your loans. Avoid buying anything on credit to make sure that your economic position is always headed in a positive direction.
This simple calculation is an important tool in a strategy of financial planning. You can make sure your money decisions are wise ones since they are focusing on a particular goal.
In addition, by analyzing your financial worth from year to year, you can track your process on achieving your money management goals. Having just one number makes it easy to measure your current status, and the changes help show you how your financial decisions are affecting your bottom line. You can easily find out if a decision is impacting you negatively, and can make efforts to correct the course in your life.
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