Let’s talk net worth, how to calculate it, and why you might want to figure it out. Let’s get the definition out of the way real quick first: What IS net worth, from a personal finance point of view?
It’s the result of this formula: Net Worth = Assets – Liabilities
Assets are the things you own. Liabilities are debts you owe. So net worth is the value of everything you own minus the value of everything you owe.
If you own more than you owe, you have a positive net worth. If the reverse is true, then you have a negative net worth. And if it’s exactly zero, that’s surprising :)
Net worth isn’t a set thing either. Instead, it’s a snapshot in time that shows your current financial picture. It goes up and down over time, but it hopefully trends up over the long term. The one thing net worth isn’t is any sort of measure of your value as a person.
Why Calculate Your Net Worth?
There are a few reasons you might want to do this. First, calculating your net worth gives you a starting point.
For example, when I was in my twenties I thought my ex & I were doing great. We had a house, 2 cars, and went on vacations. Then one day I figured up my net worth, and it wasn’t pretty, to say the least. We were in the red.
Our outside life didn’t reflect reality, and the truth is we could have lost those things very quickly. But I wasn’t even aware of where we stood until then. Figuring it out made a difference.
Second, knowing where you are money-wise can help you pick what to focus on. That’s important if you want to reach your goals. You have to know where you’re starting so you can head in the right direction.
If you owe a lot more than you own, you may want to focus on getting out of debt. If your goal is to retire early using the 4% rule, you’ll want to build up assets that produce income. Your goal is up to you, but knowing where you stand helps you know which way to go.
Finally, if you calculate your net worth on a regular basis, you can track your progress over the long haul. (I do mine monthly, and keep it in a spreadsheet.) You can adjust as needed, and watch it change over time.
Don’t worry much about how your net worth compares to other people. Worry about how it compares to you. It’s a whole lot better to compare with past you than say, some celebrity’s net worth. You live your life, not anyone else’s, so paying attention to your money is key. This is part of doing that.
What Should You Include In Your Net Worth?
While the formula itself is simple, people often have questions about what to include as assets or liabilities.
Many times people wonder if they should include assets like their house, cars, 401k, or other items like collectibles. Their questions often goes something like this:
“Should I factor in the value of my home? I’ve never thought of my house an asset even though I have a little equity.”
Or, “Should I include my cars in my net worth? They only go down in value and I can’t make money off them.”
The answer is always yes. If you own an asset, you should include its value. Even if you don’t have any equity in your house, you never want to sell it, you think your car is only worth $200, etc.
Otherwise you’re calculating something else instead. (Like investable assets for your FI number, for example.)
It’s ok if you want to figure out your investible assets separately too! There’s nothing wrong with doing that. But that is NOT your net worth. It’s something else.
Again, your net worth is everything you own minus everything you owe. So include at least a fire-sale market value of ALL your assets.
If you leave things out, it gives you a distorted picture. You need a clear picture.
Likewise, that means you should include all your debt. Sticking with the car example, you’ll include what you owe on the car as a liability.
So you’d have the amount the car is worth listed under assets, and the amount you owe on it under liabilities. Same goes for your house.
How Do You Find Out What Things Are Worth?
Finding out how much you owe on things is usually as simple as logging into your accounts. But how do you find out how much the things you own are worth?
People sometimes get stumped on this, or don’t ever figure up their net worth because they don’t want to go through a long drawn out process. There’s good news though! It doesn’t have to be hard or take a lot of time.
For liquid assets — like your 401(k), IRA, savings, checking, and taxable brokerage accounts — just log in and see.
For other things, like your home, cars, collectibles, household items, and more — it’s ok to guess at the value, as long as you aren’t just completely making up numbers. Just be consistent over time about how you estimate the values and don’t go wildly off base.
For example, you might decide that you will always use Zillow as an estimate of the value of your home. Or the comps shown on Realtor.com in your neighborhood. You might use the used Kelley Blue Book value for your cars. For collectibles, recently sold items on eBay can work. I use garage sale prices for household items, and keep the same value for them all year long unless I buy or sell something major.
Do be exact with anything you owe though. (If your goal is to be completely debt free, that part will get easier and easier.)
The important thing is to be consistent so you can see trends over time, and so you can tell if you need to make changes to reach your goals. You’ll also be able to see if, for example, you’re house poor or heavy on assets in a certain area.
How Often Should You Calculate It?
It’s up to you, but I find monthly to be good. It serves as a checkup on all my accounts as well, because I need to log in to them as part of the process.
You can do it more or less often, but at the very least I would do so yearly. If you do it yearly, you can also use that as a time to grab your cell phone and take pictures of your belongings. (Room by room, as part of a household inventory.) After all, you’ve got to know what you have. The inventory will help for insurance purposes too if you ever need to make a claim.
Should You Use a Net Worth Calculator?
You don’t really need to. But you may want to, at least the first time to help make sure you don’t miss things. Kiplinger’s form and Tiller’s spreadsheet (affiliate link) are two to consider. Or you can always create your own spreadsheet too.
No matter what you decide, give figuring it out a try. You might be pleasantly surprised, or you might not. Either way, you’ll know where you stand right now. And that’s the first step to getting where you want to be.