Here’s how to calculate net worth in simple terms! Learning how to calculate net worth is helpful to establish a bench mark and measure progress each year.
How to Calculate your Net Worth (in Simple terms)
Ever wonder how much you are worth?
Hard work, chipping away in the trenches of life, and making disciplined financial decisions are how many of us provide for and support our family. With all the sweat equity we’ve invested it is nice to measure progress by calculating your net worth.
Brand new to this? No worries! If you are new to managing your finances, the same tool applies! Assess your financial situation and start improving today!
Use it to monitor your finical progress going forward… keep an eye on that metric!
Formula to Calculate Net Worth by hand
Stated in simple terms, this formula helps us understand what is calculated:
Net Worth = [Value you Have] – [Value you Owe]
In the same fashion, use this standard formula to calculate your net worth:
Net Worth = Assets – Liabilities
It is simple, straightforward, and easy to remember! Here are some thoughts on what goes into each balance sheet category.
This is the value you own that can be sold for cash. For example, the positive balance in your checking account, 401(k), your home, cash value of your life insurance, investments, tangible property, and cash balances are all assets. If you are new to this process, then you might need a little extra time to ensure you are documenting all your tangible assets. Side note, if you have intangible assets (e.g. a patent or trademark) you can also subtract those to come up with a “tangible” net worth. For the sake of this post, we are keeping those out of scope.
On the other side of this, Liabilities represent what you owe. This includes your mortgage, credit card debt, auto loans, student loans (any kind of loan), or taxes. As you prepare to calculate your total liabilities, take a moment to ensure you have it all written down. If you don’t have a solid budget process in place or if it has been some time since you took a hard look at your balance sheet, then use this opportunity to explore your financial position as well.
Stated simply, this is the difference between your Assets and Liabilities. Let’s zoom in on one example: Billy Bob owns a house worth $50,000. The amount of the mortgage is $40,000. That means Billy Bob has equity of $10,000. Let’s also say that Billy Bob has $1,000 in his checking account, $500 of credit card debt, and a 401(k) worth $20,000. In this example, he has a net worth of:
Assets = $71,000
- $50,000 House
- $1,000 Checking account
- $20,000 401(k)
Liabilities = $40,500
- $40,000 Mortgage
- $500 Credit card debt
Net Worth = Assets – Liabilities
- Net Worth = 71,000 – 40,500 = 30,500
Now, this example is very simple. However, it outlines a template we can follow about how to document our tangible assets and liabilities and determine net worth.
Net Worth Calculator
I enjoy and prefer the process of calculating this by hand. I also find that a simple excel spreadsheet works efficiently.
However, as another option, here is an online calculator provided by Kiplinger. Drop in your various values for assets and liabilities and you are on your way.
Here is a calculator from Bankrate that may also help you. It includes future projections and builds in an estimate for growth as well which is interesting.
How to Improve Net Worth?
There are certainly several options on strategy; much of it depends upon your particular situation. Here are a few things that worked for my wife and me and some thoughts that might help you on your financial path. (In short, we ended up tackling debt and increasing our assets).
Simple Strategies to improve Net Worth
Here are a few essentials you can consider and act upon relatively quickly!
Get a Budget going
Much of this will become more clear and streamlined with a budget. You definitely need this in place to steer through the financial waters of life. Among many benefits, a budget will help bring your financial goals to life by translating dreams and goals into tangible progress.
Increase your Assets
If you haven’t already done so, make sure you’re contributing to your retirement. This comes in many forms, including the Roth IRA, and 401(k). For the 401(k), if feasible, I recommend contributing the minimum needed to get your full match from your employer.
Build your emergency fund, too! Not only will this provide some financial security, but it will also drive up your net worth, and is an effective tool to help avoid falling into crippling credit card debt balances.
Regardless, once you have a stable budget in place, I highly recommend taking the guesswork out and automate your contributions. Sit back and watch your net worth grow!
Paying off Debt
I’d recommend focusing efforts on high-interest debt like credit card balances right away. This world operates with short and long-term debt every day, all day. It is all an exercise of the balance sheet, and there is debate on whether or not a “no debt” approach is the most effective for building wealth.
By driving down the liabilities on your balance sheet you are improving your net worth. However, taking out a loan to purchase something that will appreciate will also improve your net worth. At the end of the day, you have to decide what works best for you and your family and provides financial peace and stability.
What’s the process? How Often Should you Calculate Net Worth?
If you skipped to this section first, I recommend taking the time to bench-mark yourself and calculate your net worth. Afraid of the results? Not to worry, my friend! When my wife and I first performed this calculation (after putting it off several times) we had a negative net worth!
I’d encourage you to rip-off the band-aide and get started!
After the initial assessment, we’ve kept a quarterly record to track progress toward our goals. For us, this means we take a deep-dive every January, April, July, and October. In-between, we just keep an eye on progress as it relates to the larger context of our goals.
Best of luck on your financial journey, my friend! I hope this provides some essentials and brings up some points for consideration as you move forward.
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