Let me ask you a question, where are you at right now financially?
Are you struggling? Doing okay? Is your financial situation healthy? Could it use work?
You might not know the best way to approach answering these questions and that’s okay. Your financial situation is constantly changing, and there are a lot of components to keep track of.
What you need is a way of keeping score. A single metric that gives you a snapshot of your finances right now.
Fortunately, such a metric exists, and it’s called net worth.
What is Net Worth?
In technical terms, your net worth is your assets minus your liabilities.
In less technical terms it’s what you own minus what you owe.
Your net worth can be positive or negative:
- A positive net worth indicates the amount of wealth you have accumulated
- A negative net worth means that you are in debt
In general, the bigger your net worth, the healthier your finances are at this exact moment.
How to Calculate Your Net Worth
Basically, you’re going to log into any account you have online that contains financial information and record your balances somewhere. This would definitely include:
- Bank accounts
- Credit cards
- An estimate of your home’s value (e.g. through Zillow)
- Your mortgage
- Any retirement or investment accounts
- Any other loans you’ve taken out (e.g. student loans)
Next you need to sort out which things count for you (e.g. bank accounts, investment accounts, and the value of your home) and which things count against you (e.g. credit card balances, your mortgage, your student loans).
In other words, you need to distinguish your assets from your liabilities. Add up your assets first, the subtract out the liabilities. You can either do them one at a time or add them all up and subtract them all at once.
Should I Include ___?
The way I just described it sounds pretty straightforward, but there’s actually a good deal of debate about how your net worth should be calculated.
Chances are even as you read that last section, you had all kinds of questions about things that I didn’t mention, such as:
While any of these can count as assets, my general rule is that if you aren’t planning on selling it soon, don’t count it. Also, I have to questions for you:
- If you really are planning on selling it soon, why haven’t you sold it?
- Why not just wait until the transaction is complete and count the cash?
As far as that last point goes, cash is easy to measure. For most people, there net worth is already going to include one estimate: the value of their home. We don’t need a million more subjective valuations of every item you own.
If you want it to count towards your net worth, sell it.
Calculate the Components of Your Net Worth Individually
In addition to calculating your total net worth, you should look at at least three component parts that make up your net worth:
- Net cash
- Home equity
By seeing how much each contributes to your net worth, you can decide if you are allocating your resources effectively. For instance, if your home equity makes up more than 50% of your mortgage, you might have fallen into the homeowner’s trap and are in danger of being house poor.
To calculate your net cash, add up all your bank accounts and subtract your credit card balances and any loan that’s not related to your home or investments.
So if you have $4,000 in a checking account, $20,000 in a savings account, and a $3,000 balance across all your credit cards, your net cash is $21,000 ($4,000 + $20,000 – $3,000).
This is the value of your home minus your mortgage (and any other loan backed up by the value of your house, such as a home equity loan).
So if your house is worth $300,000 and you still owe $250,000, your home equity is $50,000.
If you have any investment properties, you can calculate them the same way you calculate your home equity.
For 401k’s, IRA’s, and other investment accounts, just add up your the balance across all your accounts. As long as you haven’t taken out any loans against these assets, taking the sum of your balances is all you need to do.
The Easiest Way to Track Your Net Worth
I used to log into every single one of my accounts every month, record all my numbers in a spreadsheet, and calculate my net worth there.
I would get a chart that looks like this:
As you can see, I did this for years.
Fortunately for you, there’s an easier way. You can do the work once and then let a piece of software do it for you every day thereafter.
Instead of calculating my net worth every month, a signed up for a free account with Personal Capital. I entered my account information once, and it calculates my net worth every day:
You can sign up for Personal Capital, or you can check out the guide that I wrote that shows off the full picture of what it can do:
If you want to know where you are financially, calculate your net worth. If you want to know how you’re doing managing your money, track your net worth over time.
Net worth isn’t a perfect metric, but it’s a very useful one for being able to summarize your financial picture in a single number.