Net worth is a confusing concept for many people, but it’s much easier to understand than you might think. It’s a useful personal finance tool, one that provides a quick snapshot of your assets in the context of how much you owe.
My wife and I track ours on a regular basis. It’s helped us get a much clearer view of our finances, and it can do the same for you, too.
What Is My Net Worth? Crunching the Numbers
Net worth is essentially how much money you would have if you sold everything you owned and paid off the entirety of your debt.
The formula to calculate your net worth is: “Assets — Liabilities = Net Worth.”
If the resulting number is negative, then you owe more money than the value of your assets, and thus you have a negative net worth. If this is the case, don’t freak out. You can work toward a positive net worth by continuing to pay off your debts while growing your assets.
Examples of Assets
Assets are items that have value. While technically a T-shirt could be considered an asset because you could sell it for a quarter at a garage sale, most people count only larger items — namely investments, property holdings, and any financial accounts in your name.
Personally, the smallest items my wife and I include in calculating our net worth are our cars, but some people don’t even include those in their totals.
We also include real estate we own, all bank accounts, investment accounts, and other monetary accounts or cash we may have on hand.
Examples of Liabilities
Liabilities are debts that you owe. When it comes to liabilities, my wife and I list everything we owe, no matter how small it may be. We include items like our mortgages, tax debt, car loans, credit card debt, personal loans, loans from friends or family members, and even late bills that need to be paid.
The Importance of Calculating Net Worth
Your net worth is a simplified representation of your financial picture at a given point in time. If you calculate it multiple times over a certain period, you can determine whether it’s consistently increasing, decreasing, or staying about the same.
Of course, the goal is to increase it over time until you reach a point where you can become financially independent.
When my wife and I notice that our net worth has taken a dip, we double-check that everything is fine with our finances and accounts. If our net worth has decreased due to a decrease in investments, we usually shrug it off, since we’re long-term investors and know the market will eventually recover. However, if it’s decreasing due to a decrease in our cash reserves, we figure out what is happening and how to fix it.
How Often Should I Calculate My Net Worth?
Calculating and tracking your net worth is a personal decision, dictated by the amount of assets and liabilities you currently have. As such, how often you do so is up to you. My personal recommendation is that you check monthly, but many people check it quarterly, twice a year, or even annually.
Tracking your net worth more frequently gives you better insight to your finances.
That’s why my wife and I track ours monthly. That being said, we also realize that many items may not change on a monthly basis, while other items — like investments — may make wild swings from month to month due to the performance of the stock market. We keep in mind that growing our net worth is frequently a marathon, not a sprint — and keep our eyes on our long-term financial goals.
Things to Keep in Mind When Calculating Your Net Worth
Your net worth is a constantly changing number. Don’t worry so much about short-term swings, but instead focus on the long-term pattern. If it’s increasing at a reasonable rate over time, then you’re likely on the right track.
Sadly, even increases can be deceiving. You could be spending more than you earn and increasing your consumer debt, even with an increasing net worth. You would need to have enough growth in your investments to offset the increasing debt. Unfortunately, when your investments suffer a decrease in value due to a stock market crash or recession, your finances could be end up in much worse shape than you imagined.
For that reason, it’s important to realize that net worth is just one piece of the financial picture. You still need to track your income and expenses and budget accordingly to understand everything going on with your money.
Additional reporting by Connor Beckett McInerney.