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Everyone knows their salary; most people have a pretty good idea of their take-home pay. But do you know your net worth? When properly calculated, it’s one of the best ways to evaluate your financial health. Think about it: You could make a modest salary but have a consistent approach to savings and a frugal lifestyle. Your net worth might actually be in better shape than your high school frenemy who makes three times as much but lives in an uber-pricey neighborhood and drives a luxury SUV. Wouldn’t it feel awesome to know that?
In theory, your net worth is what you’d be left with if you sold all of your worldly possessions and paid off your debt. Net worth increases as assets grow or liabilities (debts) shrink. And of course, typically the less debt you have, the more you can save or invest.
This theoretical definition of net worth isn’t totally applicable to real life because selling all of your possessions in one fell swoop probably doesn’t actually make sense. After all, everyone needs a place to live (and many need a vehicle). And some investment accounts cannot be cashed out on the fly without penalties. Still, net worth is hands down the best way to monitor your financial progress.
The smart things you do (committing more to savings, opting against that unnecessary purchase) will reflect positively on your net worth. The not-as-smart things you do (buying a car outside your price range, making an impulsive decision in your investment account) may have the opposite effect. Figuring out your net worth and keeping it top of mind can help you going forward as you face these big (and small) life decisions.
So where do you get started?
- List all of your assets: This list will include things like brokerage and savings accounts, certain life insurance policies and real estate, all of which have the potential to go up in value. These are called “performing” assets. Then there are “use assets,” or items like vehicles and electronics that will depreciate over time. Use Kelley Blue Book or other reference tools to estimate the approximate market value of these possessions if sold today.
- List what you owe (your liabilities): Credit card debt, student loans, mortgages and vehicle loans. It all goes in this section.
Challenge: Simple arithmetic time: Subtract your liabilities from your assets. That’s your net worth.
Here are a couple of additional factors you may want to consider for specific line items:
- Your home: Determine the actual market value of your home. Depending on how long you’ve owned your home, the current market value could have increased significantly. The value of your home will figure into your “assets” side, while the balance of your mortgage is a liability. The net result is the theoretical equity you have in your home.
*Note: Remember that a home cannot be sold without a replacement (rent or a new home payment), so this is a consideration when determining your net worth.1
- Your vehicle(s): Only include vehicles in which you hold equity (no leased vehicles).
Once you know your net worth, keep an eye on it. In fact, try to update it at least once a year to make sure you’re headed in the right direction and to know, with one glance, where you stand overall. If you’re reducing your debt, your net worth should be increasing even faster. And if your net worth is stagnant or headed in the wrong direction, take the time to figure out why.
- Net worth is the most important financial figure to know, more than your salary or income.
- Use a simple spreadsheet to calculate your net worth by subtracting your liabilities from your assets.
- Make sure you revisit your net worth on a regular basis (preferably at least once a year).
Now that you know the truth behind your net worth, it’s time to learn more about managing cash flow: Keep reading to learn why it’s not just for businesses anymore. Let’s get started.
1 “Calculating Net Worth: What Should One Do With Their Primary Residence?” May 22, 2007, The Simple Dollar
2 “The Net Worth of Different Age Groups in America,” July 9, 2017, DQYDJ
3 “Net Worth Summary Statistics for Households Aged 18 to 100,” Dec. 17, 2016, Shnugi Personal FinanceThis content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.