In accounting, your ‘net worth‘ is defined quite simply as your assets minus your liabilities and is used as a tool to measure your financial worth.
Calculating your net worth can be as complex as you wish to make it; this article however looks to show you how to calculate your net worth to see whether you are in a financially strong position, or potentially heading for a LATE retirement down the track.
In other words, by adding up everything you own of significance (like your house) minus all of your debts (like your mortgage) you can see what your true financial status is. This also then helps you find ways to improve your net worth to reduce your liabilities while growing your assets.
Calculate the value of your major assets
Firstly, you will need to work out how much money and assets you currently have.
Think about what assets you own; things of material value such as cars, houses, trailers, boats, shares, art works, antiques of high value and so on. Assets also include your savings accounts, term deposits and other investments.
Start by listing these items in Excel (or ideally your Budget Spreadsheet). You can find the current value of assets such as cars by doing a bit of research (visit carsales.com.au for example to calculate the going rate of your car).
For assets such as your house – you could opt to find similar listings currently for sale or ideally get a real estate agent to come and provide an honest appraisal of value to get a stronger indication.
The more accurate you can value these assets – the more ‘true’ your personal net worth figure will be. Spend some time ensuring you have remembered all of your assets.
Now it’s time to add them up.
Here is an example of what your list might look like:[table id=9 /]
Calculate your liabilities
This is the money you owe to others; banks, friends, institutions and more.
Liabilities include debts like car loans, personal loans, credit cards, mortgages, student loans and more. Spend some time to find the exact amount of money you owe (ring the banks and financial institutions to get an exact balance).
Here is an example of what your liabilities might look like:[table id=10 /]
As a side note, perhaps now is a good time to shop around for better deals
While you are looking into what loans and credit cards you have, take note of your current interest rate and fees, maybe it’s time to switch providers or to take up a low rate credit card balance transfer offer. This is a great time to reduce the interest you are paying so these debts can be paid off quicker.
Finally, it’s time to calculate your personal net worth
The calculation of your net worth is basically saying “What would you have left over if you sold all your assets and used the money to pay all of your debts?”.
To calculate your net worth simply subtract the total of your liabilities from the total of your assets.
Using our previous examples it would look like this:
Total Assets – Total Debt = Net Worth
- $435,000 – $284,000 = $151,000
What if I get a negative figure when calculating my net worth?
It’s hard not to panic if your calculation equals a negative figure but this could simply indicate that you are a young earner who has just finished studying and racking up a student debt while only working casual hours for three years.
Alternatively, your net worth could be getting brought down due to a number of debts that now require your attention.
Ok, you now have your net worth.
How do you increase your net worth?
Your goal should be to increase your net worth in two ways.
Growing your assets: ideally you need assets other than cars and boats, as these assets will depreciate over time – you need assets that grow in value over the longer term, things like property, shares, savings accounts.
Reducing your liabilities: pay off credit cards, pay off personal loans, make voluntary lump sum repayments to any debt you have to rapidly pay it down. Like any debt repayment strategy, it’s often wise to focus on the debts that cost you the most first (e.g. prioritising a high interest credit card over say a HELP/HECs debt from University).
How often should I calculate my net worth?
This one is up to you, if you want to stay motivated to improve your net worth and are working towards paying down your debts then you might find it useful to calculate your net worth at the end of each month.
For the data nerds out there (like us here at Savings Guide, you could track the net worth figure in Excel to watch it grow over time, month by month).
If this seems a bit daunting then once a year and after any significant changes (such as selling your house) will help you to keep a close eye on your overall financial situation.