How to Calculate Net Worth
One of the most useful and commonly evaluated financial metrics is net worth. Net worth is the value of everything you own, including financial and non-financial assets, minus everything you still owe, otherwise known as your liabilities. The higher your net worth, the better your financial status.
Your net worth is an excellent indicator of your financial health and can be especially useful when comparing your fiscal position over time. It is also often used in personal or small business loan applications. There are several ways to calculate this popular metric and knowing how to evaluate your net worth is a great skill to have.
How to Find Net Worth
To accurately calculate your net worth, you need to have your financial records organized and accessible. The first step is to take an inventory of all that you own and your outstanding debt. When working with a financial planner, most will recommend you securely store this financial information and update it at least annually.
Your assets include everything from the value of your home to the cash in your chequing account, while debt is represented by mortgages, car loans, and credit card balances, to name a few things.
The basic formula is:
NET WORTH = ASSETS – LIABILITIES
How Do You Figure Out Your Net Worth
Step 1: Calculate Your Assets
It is easiest to start with your most considerable assets. Commonly included are the value of your home, other properties you own, and vehicles. Even if you are still paying for your car or home, they should be included as assets.
For example, if you have a mortgage on a property with a market value of $500,000 and the remainder on your loan is $300,000, you will include $200,000 in your asset total.
You can then look at your more liquid assets, including cash, chequing and savings accounts, and all retirement accounts. Lastly, consider any personal items that carry significant monetary value. We would suggest including things worth at least $500. The total of all these items represents your total assets.
Note that your income is not included when calculating net worth. An individual may earn a healthy salary, but if they spend most of their money, they would have a low net worth. On the contrary, someone making a modest income could generate a higher net worth if they were a disciplined saver.
Step 2: Total Up Your Debt
Included in this step are mortgages, credit card balances, and auto, student, and personal loans. The total from all these debts represents your total debt in the net worth calculation.
Step 3: Calculate Your Net Worth
Take your total assets from step one and subtract your total debt from step two; the resulting total is your net worth.
A simple example:
If your total assets were $500,000 and your total debt $350,000, then your net worth would be a positive $150,000.
How to Know Your Net Worth
Another version of this calculation is used to determine your tangible net worth. The analysis is the same; it just goes one level further by subtracting the value of any intangible assets you might have. This could include intellectual property, patents, goodwill, and copyright.
The calculation of tangible net worth is often used when evaluating businesses to determine the company’s liquidation value. This metric is also commonly used when applying for small business or personal loans.
There are plenty of online calculators available that you can use to determine your net worth, or even a simple excel sheet will do the trick. As with any financial evaluation, accuracy is key, which is why many individuals prefer to work with a professional financial planner.
The expert team at Creative Financial Group assists individuals and families with their financial strategies. We can help you evaluate your current fiscal health and formulate a plan for a prosperous future.
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