When you’re beginning to organize your financial life, one major step in that process should be to calculate your net worth.
Your net worth is a very simple calculation. It’s just your assets minus your liabilities.
In other words, if you sold everything you own and used that money to pay off what you owe, how much would you have left? That’s your net worth.
Calculating your net worth can be beneficial for several reasons. Want to know my favorite? It makes you sit down and determine actual numbers for both your assets and your liabilities.
You would be surprised by the number of people that have come to me saying, “yeah, we have about $25,000 in credit card debt” and then after doing their net worth statement, it turns out that they have $10,000+ MORE than what they originally thought.
Your net worth can also help you determine things that you own and could sell to get further ahead in your quest for financial freedom.
Have a bunch of old jewelry lying around? Put it on eBay. Tons of books that you’re not reading? Sell them on Amazon. Get the point?
So, let’s get into how to calculate this wonderful thing they call “net worth”.
As usual, I’ve created a handy dandy spreadsheet for you to fill out. Just enter in the values and let the sheet do the rest!
Let’s go over a few of the things on the spreadsheet.
Your assets are the things you own that have value and could be used or sold to increase cash flow.
Assets that a majority of people have include:
- Cash in the Bank
- Cash On Hand
- Personal Residence
- Other Household Goods
- Retirement Accounts
- Brokerage Accounts
- Cash Value Life Insurance (whole life, universal life, etc. – NOT term)
As you can see, all of these items have some sort of value. It may take you awhile to sell your personal residence, but you could theoretically sell it to generate cash flow.
When determining the value of your assets, you should value them at only what a willing buyer would pay for it. In other words, do not value you residence at what you theoretically want, value it at what similar houses in your area are selling for. For valuing your residence, try Zillow.
When inputting your liabilities, use the full balance due. In other words, get the exact balance as of the day you complete the form.
Some common liabilities include:
- Home Equity Line of Credit
- Car Loans
- Recreational Vehicles
- Credit Cards
- Student Loans
- Personal Loans
- Family Loans
- 401(k) Loans
To put it simply, include any money that you owe someone, even if it’s family.
Your Net Worth
After you enter in all of your assets and liabilities, the spreadsheet should calculate your net worth for you. If you’re using the PDF, you’ll need to break out the calculator and determine your net worth yourself.
Your net worth will be either positive or negative.
Yes, your net worth can be negative. Is that a bad thing? Not completely. It just means that you have to work a little harder and attack your debt. You’ll see your net worth tick up as you do.
Is your net worth some amazing number? No, not really.
Your net worth doesn’t take into account factors such as your income earning potential and things such as your frugality. In other words, you may be able to increase your net worth at a much greater pace than someone who is starting out at the same level as you. It all depends on these “other factors”.
For example, maybe your net worth is -$150,000 because you have a ton of student loans due to medical school. Well, your income potential is now much higher. So, if you play your cards right, you can move your net worth into the black pretty quickly. However, is someone else has the same net worth due to student loans and their income potential is lower, it’s going to require a much greater effort on their part to increase their net worth.
Most importantly, I want you to use your net worth statement as a sheet that shows things you own, and dollars that you owe.
It’s as simple as that.
Net Worth Software
After you complete your net worth statement, I recommend using software to track it over time.
I use Personal Capital to track mine. It’s free and allows you to aggregate all of your information into one easy account. You can then use their reports to track your net worth over time.