Have you ever thought about calculating your net worth but didn’t know how to calculate? Net worth is the total value of the person. This includes all the assets, financial instruments, land, and infrastructure that person owns and subtracting the liabilities from them to get the net worth.
This is a basic way to calculate your net worth. Many people can comprehend till this point. But the main problem they face is while categorizing items in the asset and liabilities column.
Many people do not know what assets and liabilities they have. Sometimes, they may own an asset but never thought of it as an asset and vice versa. So, this is a general problem that keeps people confused. But you don’t have to worry anymore. In this article, we are especially going to learn about net worth and how you can calculate your net worth.
Why is net worth important?
Net worth is an important factor in managing your personal finance. We all work to earn money, but have you ever thought, how much money is enough money? This question confuses many people. They may have said they wanted money but never thought about how much money.
Once you decide how much money you have, then you will have a goal to reach. Your net worth is the true worth that you have. For example, you may have a savings of $200,000 and $100,000 as a liability (bad credit loans, debts) and have a goal of $250,000.
You may think you are only $50,000 away from achieving your goal, but the reality is you are $150,000 away from reaching your goal because the $100,000 worth of the money will be spent to pay back the $100,000 loan.
People work hard every day to achieve their financial goals, but the money just flows out of their pockets when they receive their paychecks. So, net worth is also important to know where your money is flowing.
What is an asset?
If you spend money to buy an item, equipment, or anything that helps you make money or assist in the process of making money is considered an asset. Now, remember, we said anything that puts money in your pocket. Here, investments are also an asset because they grow over time.
Financial instruments, such as gold, silver, or any commodity, are considered assets because their value appreciates over time. So, even if they do not produce any immediate return, they are a great asset for the future.
What is a liability?
Liability is the thing that takes your money out of your pocket or depreciates in value. Short term loans, credit card bills, business loans, cars, and homes are considered a liability.
Many people disagree with the fact that a home is a liability, but it depreciates over time, and you have to furnish it regularly. These all activities take money out of your pocket. Hence, making it a liability to you.
How to calculate net worth?
The basic net worth formula is an asset – liabilities = net worth. And as we have explained to you what are assets and liabilities, you can pretty much sum up your assets and liabilities and subtract them to calculate your net worth.
Do remember that the net worth is the projection of your total worth, and it is not necessary to have all your net worth in your bank account.
Steps to calculate your net worth
- To calculate your net worth, start by listing all your assets. If you don’t have a good idea of how to start, we have listed some basic assets to get you started.
- Bank balance
- Investment portfolios
- Online business
- Physical store or business
- Real estate (including your home)
- Vehicle
- These are the things you own, and after summing up their numerical value, you will get the complete value of your asset column.
- The next step is to calculate your liabilities. Liabilities are anything you have borrowed, loaned, or taken with the promise to pay back together or in small installments. So, sum up your liabilities together. Below are some basic types of liabilities to get you started.
- Bad credit loans
- Education loan
- Home loans
- Asset on lease
- If you have taken a loan to buy your house or any asset, that value is also added to the liabilities.
- After summing up the whole asset and liabilities section, deduct them, and the final value shown is your net worth.
Can net worth be bad?
- Net worth is good as long as you have a positive integer. If the numerics go negative, things can get tough for you. For example, a person has an asset value of $10,000 and a liability value of $7000.
- Here we can see that their total net worth is $3000. So, it is good net worth. However, if we reverse the situation and the asset is valued at $7000 and liabilities are valued at $10,000, then the total net worth will be valued at -$3000.
- This is a problematic situation because your liabilities exceed your total asset value. If in case a catastrophe strikes you, even after selling all your assets, you will have a $3000 debt on your head.
- So, as long as you are not negative, you are good to go. But try to increase your asset column without adding to your liabilities section.
So, to sum up, net worth is a good indicator of your financial position. The more worth you have, the better life you can have.
And it is also important to have a good balance of your assets and liabilities. If you want to skip all the hard work to calculate and just want to see your net worth, you can take the help of an app or online website to calculate your net worth.
However, the results they provide have a high chance of being inaccurate. But they can be a good way to start. But if you need an accurate picture of your net worth, then you can take help from financial advisors or calculate it yourself.