You will need:
- Net Worth worksheet
- Records of loans, bills or other debt
Time required: About 1/2 hour
What is net worth?
Net worth is the difference between assets and liabilities, or in other words, The total value of all assets (cash, investments, property, etc) after the debt is subtracted off. Net worth is one of the best indicators of your current financial position at any given time, and is important when gauging the progress towards your long term financial goals. Keeping track of your net worth each year will help in planning your budgets for the coming months.
Besides helping keep track of your financial progress, the record of your net worth is important for many circumstances including:
- Writing a will
- Settling a divorce
- Determining insurance needs
- Applying for a loan
How often should net worth be calculated?
Because net worth takes into account all assets and liabilities, people who are experiencing (or starting) major financial changes should calculate their net worth 2-3 times a year. An example of when to find net worth 2-3 times in a year would include someone who is just starting to climb out of debt and has starting putting large efforts into paying down the creditors. In this case, reviewing the net worth more often helps to keep the goal in focus by showing improvement, and to remind of other assets that could be sold or used differently. With that said, once per year is still sufficient for most people.
How to calculate net worth
Calculating net worth is easy! In fact, it’s easier and faster than setting up a simple budget, and can be quickly updated in just minutes. To make it even simpler, you can download a net worth worksheet here.
Step 1. Make a list of all your assets and liabilities
In the net worth worksheet provided, most common assets and liabilities have been pre-recorded. Simply add any extras that don’t appear on the sheet.
Include anything that is of significant value. Some common assets are Real estate, vehicles, boats, RVs, investments, jewelry, coin collections, music instruments, valuable antiques, and savings/checking accounts. The same goes for liabilities. Include everything from the home mortgage down to the credit card.
Step 2. Record the current values and debts.
Many assets have fixed values that are simple to find (such as stocks, bonds, cash, etc) while others you will have to estimate (vehicles, jewelry, real estate, etc).
A word of caution: Be conservative when estimating values. Over estimating will cause a poor estimate of net worth. Many assets such as vehicles, boats, RV’s and musical instruments depreciate over time, so if you bought your boat for $10,000 you should put some value less than that as its current value.
Step 3. Calculate equity
Equity can be positive or negative. Positive equity means that if you were to sell the asset and pay off the debt, you would have cash left over. Negative equity is the opposite. Take a new car purchased on debt. You get a great deal on a brand new car, and you financed the full price. As you drive the car off the lot, the value just dropped. Now you owe more than the car is worth, so it has negative equity.
Once you have calculated the equity for each asset, add all the equities up and record the sum on the Total Equity line.
Step 4. Calculate total liabilities
The liabilities section is for other debts that aren’t directly connected to assets. Student loans and credit card debt are some of the most common. Once these liabilities are recorded, add them all up and record the sum under Total Liabilities.
Step 5. Calculate net worth
You’re just about done! The last step is to take the about record under Total Equities and subtract Total Liabilities. The result is your net worth! In case you got stock along the way, I’ve included a sample of a completed worksheet.
Understanding your net worth
Net worth is a simple concept to grasp; the higher the number, the richer you are! If your goal is a net worth a million dollars, then your net worth will quickly show you how close you are to that goal. If you have a negative net worth, take a look at your liabilities and your assets with debt. Although everyone should avoid getting into a negative net worth at all costs, there are still ways out. If you are in that situation, I recommend checking out the financial university. If you have lots of debt, I recommend the book “Total Money Makeover”. You can buy it through our store.