You may have heard the term Net Worth, but what does it mean, and how can you calculate your own?
What Is Net Worth?
Your net worth is a single number that can be used to determine your current financial position.
This number could be positive, or negative, and can be tracked over a person’s lifetime. Tracking net worth can be a helpful way of understanding if your finances are improving or not.
Someone who has worked for fifty years and has successfully managed their money may have a high net worth. Whereas, a recent graduate who’s just started a job, is more likely to have a low, or even negative, net worth.
How Do You Calculate Net Worth?
The basic net worth calculation is Assets – Liabilities = Net Worth.
1. List all your assets
An asset is described as something that is useful or valuable to a person.
Start by writing down the value of everything you consider to be an asset. This could be the value of your property or your car. The amount of money you have in savings, investments or checking accounts. Or money you have saved in retirement funds. If you have expensive jewellery, or a designer bag this could also be included as an asset.
Generally, you only need to note down everything that could provide a source of cash flow in the future. For example, if you own an expensive piece of tech, only include this as an asset if it’s likely to one day generate some money. Likewise, if you don’t actually own the item then you can’t consider this an asset.
2. List all your liabilities
Next, you’ll need to note down all your liabilities.
A liability is anything that you are responsible for, especially an amount of money owed. In this list of liabilities, you should include things like the balance of any mortgages, student loans, credit card repayments, etc. If you have any big household bills, or taxes due, you could also include these as liabilities.
3. Calculate Assets – Liabilities
Once you know both the sum of your assets and the sum of your liabilities you now just need to subtract them. The number you have left is your net worth.
John is 40 years old. He owns a home worth £200K and has £50K left to pay on the mortgage. He also owns one car, which he paid for in full when buying. John hasn’t paid off all of his student loans yet but does have some savings. He owes £4K on credit cards. He has also been adding into his pension pot since the age of 25.
House – £200K
Pension – £30K
Car – £12K
Savings – £22K
Total assets = £264K
Mortgage – £50K
Credit cards – £4K
Student Loan – £10K
Total liabilities = £64K
We can now work out that at this current moment, John has a net worth of £200K (£264K – £64K)
What If My Net Worth Is Negative?
If you’ve calculated your net worth and are panicking that it’s a negative number, try not to worry too much. Normally a negative net worth is as a result of a young earner, with high student loan debts. As you begin to create a solid financial routine, your assets will start to increase enough to outweigh any debts.
Can I Track My Net Worth?
The number you have just calculated is a one time view of your net worth.
It can be a good idea to revisit this calculation a couple of times a year, writing down the value as you go. As you add to your savings accounts or pay off any debts you should see your net worth value increase.
Seeing this increase is a sign of good financial health! Some people, therefore, find that tracking this number is a great motivation to keep hitting their financial goals.