For others, net worth is a status symbol to pursue above all else. Case in point, the term “millionaire” is just an arbitrary net worth marker at which we decide someone has achieved special social status.
For yet others, discussing net worth is an abhorrent reminder of our society’s wealth obsession - placing money on a pedestal above all else.
It’s no surprise with all these emotions swirling around net worth, that most people don’t think or talk about it in a rational way.
If you resonate with any of these, let’s get you more knowledgeable and comfortable around your net worth!
Talking About Net Worth
We’ll discuss in detail how to calculate your net worth, but for now, let’s talk about why it matters.
A high net worth can provide you with opportunities and flexibility in choosing how to live your life. You can take more risks, try new things, and intentionally design your lifestyle around your preferences.
A low or negative net worth can restrict you. You may have to stay in a job that’s not right for you, stress about paying bills, rent, and loans, and pass up on opportunities.
Thanks What Net Worth Isn’t
Before we move on to the calculation, let me be clear on one more thing.
Net worth has nothing to do with a person’s value as a human being. There are wonderful people with high net worths and wonderful people with low net worths.
When we use “net worth” going forward, know that we simply use it to describe your financial position, not your quality as a person.
Figuring Out Your Net Worth
Figuring out you net worth involves a simple calculation.
Net worth = Assets - Debt
It sounds easy, but calculating it can be a bit tricky - and people often leave things out! So I’ve provided the below three-part guide, with examples, for figuring out your net worth.
I highly recommend using either Google Sheets or Microsoft Excel to keep track of everything.
Part A: How much money do you have?
Start by adding up all the money you have in your bank accounts, investments, and retirement accounts. Then estimate the value of your car and home (if you own either) and add them to the total.
Example: Vijay has $100 in a Bank of America checking account, $300 in a Bank of America savings account, and $1,100 in a Fidelity Individual Retirement Account (IRA). Vijay leases a car and rents an apartment, so he doesn’t include those as assets. Vijay’s assets are $100 + $300 + $1,100 = $1,500.
It’s possible adding up your assets will be an easy exercise. But for most of us, it will be difficult. You may have to remember old bank passwords or find financial statements.
Part A takeaway: Today, I have $_________ in assets.
Part B: How much money do you owe?
Next we’re going to determine your total debt. Add up the amount you owe today on credit card loans, auto loans, student loans, mortgages and other debt.
Example: Vijay has $500 outstanding on his Bank of America credit card. He also has $1,200 left on his student loan. He doesn’t have auto loans or a mortgage. Vijay’s total debt is $500 + $1,200 = $1,700.
For many, adding up debt will be difficult emotionally. Debt is an uncomfortable topic. It can sometimes seem impossible to overcome. But to pay off your debt and succeed financially, you’ll need to start by knowing where you are today.
Before you move on to the next section,I recommend actually adding up your loans and writing down your total debt. You may need to login to accounts you haven’t looked at in ages. But it’s worth the effort!
Part B takeaway: Today, I have $_________ in debt.
Part C: Determine your net worth
Now that you know your assets and debt, you only need simple math to calculate your net worth.
Once again, Net worth = Assets - Debt
Example: Vijay has $1,500 in assets and $1,700 in debt. Vijay’s net worth is -$200.
It’s perfectly OK if your net worth is negative like Vijay’s. That’s quite common, especially for us millennials. Just remember this is your starting point and you’ll move forward from here!
Now that you know your net worth, you’re done right?
Well actually, you’ve just begun!
I highly recommend you complete this exercise once per month. Net worth is a helpful barometer to know whether your financial situation is improving or worsening over time.
Savings Academy clients have found it super motivating to continually see their net worth improve as they pay off debt and build up savings. I also find net worth tracking motivating in managing my own finances!
Here are some practical tips for tracking net worth:
Do you currently track your net worth? If so, do you have any other tips for doing it? If not, what’s holding you back from starting? Let us know in the comments!
Did you find this helpful, but want more personalized guidance? Sign up for a free Q&A call today to learn if financial coaching would be right for you!