Do you know your net worth? If you don't, you should. This is an important number because tracking it can help you determine if you're making progress in achieving financial independence, or going down a dangerous path that could leave you broke or in debt for decades.
The good news is that figuring out your net worth is very simple. And once you've calculated it once, updating it is easy, and is a great way to see how you're doing when it comes to your money.
How to calculate your net worth
Your net worth is the measure of your assets minus your liabilities. It shows you how much wealth you've amassed, or how much you actually own after subtracting for your debts.
To calculate your net worth, start by adding up the value of all your assets, including:
- Bank accounts and investment accounts
- Real estate
- Your vehicles
- Your personal assets
- Any other items of value you own
Next, add up your total liabilities, meaning all of your outstanding debts. Be sure to include:
- Mortgage loans
- Car loans
- Student loans
- Credit card debt
- Loans you owe to family and friends
- Personal loans
- Payday loans
If you have an obligation to any creditor that you have to pay back, this should go on the list.
Finally, subtract the value of your liabilities from the total value of your assets to figure out your net worth.
If you own $200,000 in property after factoring in your house, car, and investment accounts, but you owe $250,000, you'd have a negative net worth of -$50,000. But if you have $500,000 in assets including your home and you owe just $250,000, you have a positive net worth of $250,000.
Why is it important to know your net worth?
You need to know your net worth because it's a simple way to measure where you stand when it comes to your finances.
Ideally, you want to have a positive net worth and own more than you owe. A positive net worth means you've built some wealth, while a negative net worth means you're in debt for more than you own and have to keep working to climb out of the hole.
Calculating your net worth one time gives you a glimpse of where you currently stand, but calculating your net worth over time can show you if you're moving in the right or wrong direction. It can also help you to track your progress toward achieving financial independence.
It's pretty normal for most people to start out life with a negative net worth, perhaps because you've borrowed for a house, car, or degree. But as you work on paying off your debt, your assets appreciate in value, and you acquire more investments, your net worth should become positive, and the number should keep going up.
If your net worth is declining, this could be a red flag that you need to stop taking on debt and start investing in assets that will improve your situation. But if your net worth grows steadily over time, this should give you confidence you're doing the right things with your money.
Calculate your net worth today
Now you know both why you should calculate your net worth and what this number tells you. While it may take a little time to figure out the value of your assets the first time you do this, you can easily update your account information to track your net worth over time.
So do the math today, get an idea of what your starting point is, and keep track of how your assets and liabilities change over time. When you do, you'll hopefully see your net worth keep rising.