Measuring financial progress is essential when trying to improve your financial situation, yet if you have no benchmark to measure your progress against then how do you know how well you are progressing? Using your net worth is a great quick and easy way of how you can do this.
What does net worth mean?
Your net worth in a nutshell is your total assets minus your total liabilities; it’s as simple as that, and calculating your net worth at regular intervals is a great way to measure and track your financial security and well-being.
There are net worth calculators available on the internet that basically do the calculations for you, but many of them are out of date and it’s just as easy for you to carry out the calculations yourself. All you need to proceed is your recent financial statements and you’re good to go.
Calculate your total assets
The first step is to calculate your total assets and to start I would advise starting with your biggest assets first, this will most likely include any property that you own, including your primary residence and any vacation properties that you may own. You should also include any vehicles that you own in the large assets section.
Next you should include any personal items that you own, including any jewellery, collectables and any furnishings from your home. When adding up this section you don’t have to include everything, just those items of some significant value, e.g. $50+. When adding up your belongings, be careful not to over estimate their value as the items will lose value over time.
For the next step you will need your financial statements while you work out how much money you have in savings or checking accounts, for me in the UK this could be an ISA savings account, if your US based this could be your 401(k), IRA or LSA. Remember that some of your savings accounts may be restrictive and you may incur charges when you want to withdraw money so make sure you take this into account.
Calculate your total liabilities
Right, once you’ve calculated all of your assets it’s time to add them all up to find out your total assets figure, once you’ve done this it’s time to move on to your liabilities. Again, you should follow the same structure, deal with your major liabilities first e.g. your mortgage and any loans that you have.
It’s important to remember that liabilities normally represent an obligation that there is something you need to repay. With this in mind, normal bills that you would associate with daily living, i.e. food shopping are not normally considered a liability as they normally come under expenses.
Once your major liabilities are listed move on to your smaller liabilities and ask yourself who you owe money to. This could be in the form of credit card debt or a student loan, and again once you think you have identified all of your liabilities, add them up to give you a total.
Calculate your net worth
Now that you have both, a total assets figure and a total liabilities figure, you can now work out your net worth by deducting your liabilities from your assets. Now you have a figure that you can use to manage and track your financial situation. But what does this figure mean?
What does your net worth mean?
If your net worth is a positive figure, then this means that you could use your assets to pay off all of your liabilities and you have would have some funds left. A negative figure means that even if you used your assets to try to pay off your liabilities, you would still be left with debt.
Use your net worth to benchmark your financial progress; you can increase your net worth by either increasing your number of assets, or reducing your liabilities.
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