Net worth is an important number. I know I’ve said in the past that its not as important as you think and I still think thats true. Knowing what it is and and how to calculate your net worth is important to your financial success.
Your net worth is a number that is useful for understanding where you are at in any moment in time and the trend of your net worth will help indicate whether you are making good financial decisions. In this post I’ll detail some thoughts about net worth and then walk you through how to calculate net worth.
Did you know that businesses also calculate their net worth? Its called a balance sheet and they are required by law to distribute it to shareholders every quarter and once a year. I’ve already discussed how treating your home like a small business is a good mindset to have and I think putting together a balance sheet/net worth is an important step.
What is net worth
A net worth statement holds the same characteristics as a balance sheet. It details out your assets and liabilities at a snapshot in time. In short your net worth is how much cash you’d walk away with if you sold everything you had, assuming you got fair market value for things like your home and cars.
I calculate my net worth on the 1st of every month. Doing it with this frequency helped me realize I added 250k to my net worth in 7 years. While once a month may seem overkill for some, I encourage you to find a frequency that works for you. With using the spreadsheet I do it takes all of about 10 minutes to do.
What isn’t net worth
1: Its not how much you make
Is it just me or do you hear “they must be worth so much” when talking about a high paid CEO or entrepreneur. The thing most people haven’t conceptualized is the fact that being paid a lot does not mean you are worth a lot.
Its not how much you make, its how much you keep.
2: Its not how much you could buy
Unfortunately your net worth doesn’t indicate how large of a shopping spree you could go on at Target. While it may help you decide your net worth number, by itself, isn’t enough information.
For instance you could be worth 5 million dollars and that could all be in retirement accounts. You may be able to buy yourself a target when you hit 59.5 but you can’t touch it until then.
Another good example is Jeff Bezos. He’s worth 133 billion at the time of me writing this in February 2019. Something that a lot of people don’t realize is that the vast majority of his fortune is tied up in Amazon stock. For instance he couldn’t go buy something worth 100 billion.
If you have all your net worth tied up in retirement accounts you and Jeff do share one problem, lack of liquidity. He can’t really do much about most of his net worth tied up in stocks just like you can’t do much about the millions sitting in retirement until you are old enough.
On the other hand if you had 5 million sitting in a checking account thats completely liquid and you could, in theory, go spend it all tomorrow.
Why I Use Net Worth
I use a lot of metrics to understand my personal finance situation. Month to month I look at my income and expenses, more specifically, the gap between the two. This ensure I’m living a life well within my means. On a larger scale I use net worth to ensure my financial decisions are taking me in a positive direction.
In another post I’ll get into the details on how to increase your net worth but, in its most simple form, its save and invest. If you save and invest every month for a few decades you are probably going to end up ok.
How to calculate your net worth
The actual calculation of your net worth is pretty straight forward. You can download this google sheet I’ve put together to help make it even easier. There are three simple steps.
1: Add up all your assets
Assets are essentially things of value. Here is a comprehensive list that should cover most assets:
- Checking accounts
- Savings accounts
- retirement investments
- taxable investments
- HSA accounts
- 529 accounts
- Your home
- Any type of second/vacation/rental home you own
- Your vehicles (cars, boats, etc)
2: Add up all your liabilities
While assets are anything of value, liabilities is essentially any debt you owe. A fairly comprehensive list would be:
- Your mortgage
- Your credit cards
- Student loans
- Auto/Boat/Etc Loans
- Anything else you may owe money on
3: Net Worth = Assets – Liabilities
Just follow that equation and you’ll get your number!
What is a good net worth
Every situation is different when it comes to whats a “good” net worth”. To me the most important thing is that your net worth is growing. I started out with a severely negative net worth and, slowly but surely, have turned things around.
If you did a quick google search you’ll be able to find several resources to help set some general guidelines (like this one or this one) to get an idea of where you stand to the general population. I’d encourage you to focus on yourself and trying to do your best. Base your goals on the financial plan you hopefully have for yourself. If you want an example here is mine.
Well there you have it. Whats your net worth? What type of progress have you made? I’d love to hear in the comments or on social media!