Net Worth: What It Is, How to Calculate It, and Why It's Important.

We have all had a glance at the Forbes List of the richest people in the world. The richest person in the world at present is Jeff Bezos (Amazon). His net worth is $187.4 B. But what does the term net worth even mean? How do you calculate net worth? Why is it important?

How Do You Know Your Net Worth?

Your net worth is how much cash you would have in hand were you to sell all your assets and pay off all your debt. In other words, net worth is the balance of what you have (assets) versus what you owe (liabilities). Net worth is a good indicator of your financial health. Once you have calculated your net worth, every financial decision that you make should lead to an increase in your net worth.

How Can I Calculate My Net Worth?

Calculating net worth is quite easy. Using a spreadsheet or good old-fashioned pen and paper, make two columns and, write down the following values:

Step 1: List Your Assets

In the left-hand column, write the heading ASSETS. Below this heading list all your liquid assets and fixed assets, and an estimate of their current value. Items that could be included in this list include:

Home.
Automobile/s.
The total value of stock holdings and investment accounts.
Life insurance or retirement savings, e.g. 401(k).
Current balances on checking and/or savings accounts.

Some of these assets will have specific values. For example, your 401(k) and your checking account. Other assets might not be so easy to gauge at first glance. The value of your home and your car can fluctuate from time to time. You can look to apps such as Zillow and Redfin to help you calculate the current market value of your home. For an accurate estimate of the market value of your car, apps such as Kelley Blue Book and Edmunds are good options.

Now that you have listed all your assets, write TOTAL ASSETS at the bottom of the column, and tally up all the values.

Step 2: List Your Liabilities

The next step is to calculate your liabilities. Under the heading DEBTS, list the following:

Your credit card balance/s.
Personal loans.
Auto loan/s.
Home loan.
Student loan.

Write TOTAL DEBT at the bottom of the column. Tally everything up. Now you have your total liabilities.

Step 3

To calculate your personal net worth, subtract the value of your liabilities from the value of your assets. Total assets – Total liabilities = Net worth.

If you do not feel confident with your own calculations, you can try an online net worth calculator or ask a financial advisor to guide you through the process the first time.

What Should Your Net Worth Be?

The value of your net worth will, to a great extent, depend on where you are in life. If you are a young working adult fresh out of college, your net worth is likely to be low, perhaps even in the negative. This is likely due to student loan debt and very few years of salary earning to chip away at that debt. Perhaps you have even made your first investment in real estate. More debt = negative net worth. However, this is nothing to feel bad about. With each year in the workplace, your salary should knock more and more off your debts, improving your financial situation.

In the ideal world, we would all like a high net worth. But very few start out that way. Being aware of your net worth and working to increase it each month will lead to good financial health.

How Do I Increase My Net Worth?

A negative net worth can be due to one of two reasons. Either you have not earned or invested enough money to counter the burden of the debt that you owe on student loans or a car loan. Or, your negative net worth can be a result of over-borrowing. For example, you have accumulated hefty credit card bills and are not able to pay them down.

If your net worth is in the negative, you will want to get started right away on changing that. How do you increase your net worth? This can be done in several ways.

1. To Increase Your Net Worth, You Need to Reduce Your Debt

Reduce spending on credit cards and work at paying them down. Pay off all of your debt as soon as you are able to. Just check the fine print on repayment plans. Some, for example, mortgages, might levy penalties for early payment.

Identify debt with a high interest rate and prioritize paying those first. Alternatively, you can consolidate the debt by taking out a bigger loan that has a lower rate. It is much easier to keep track of one larger repayment than a few smaller ones. And, if you can get a reduced interest rate, you should be able to resolve the debt more quickly.

2. Maximize your Retirement Contributions

Many private employers offer retirement plans that help you to stay ahead of the tax curve. For example, 401(k)s. Retirement contributions boost your net worth in two ways. Firstly, your taxable income is reduced, so you are paying less tax over time. Secondly, you are increasing the number or value of assets that can accrue interest.

You can also investigate other tax-exempt accounts. For example Roth IRA (individual retirement account).

3. Cut Expenses by Knowing Where Your Paycheck is Going

Everyone knows that eating out and buying the latest tech can do us in financially. However, it is often the little things that really add up too. Take a few minutes to set up an expenses spreadsheet to track what you are spending money on each week. Keeping track of where you are spending your salary will help you determine where to cut back.

4. Keep Money You Have Saved Where It Will Grow

By increasing the value of your assets, your net worth will improve. In other words, make sure that the bulk of your money is kept in an interest-bearing account. Even better, invest your savings. If the stock market makes you tremble in your shoes there are other options. For the risk averse, a guaranteed investment contract could be a good option, or an index fund.

Ways to Make More Money

There are several tools that you can use to help you boost your mortgage payment or pay off a car loan more quickly. To boost your income from the comfort of your couch, you can take part in online surveys, focus groups, and shopping for bargains online.

How Often Should I Check My Net Worth?

It is a good idea to make a habit of checking your net worth balance sheet regularly. To keep track of your expenses and the debit orders being deducted from your account. You should be checking your bank account statements every month. Why not include a net worth spot check in this process?

Why is it important to track my net worth? Ideally, you want your net worth to be increasing over time. Making a habit of checking it regularly will help you to know if the financial decisions that you are making are the right ones.

How Much Do I Need to Retire?

One good reason for being aware of your personal net worth is knowing how much money you will have when the time comes to retire. Many experts say that the ideal retirement income should be 80% of your salary prior to retiring. So, if your annual salary is $60 000 in the years before retirement, you should have $48 000 per year of retirement available in your retirement accounts. Depending on whether you have other sources of income and the kind of lifestyle that you would like to lead during your retirement, this amount can be adjusted up or down.

How Much Should I Have at Every Age?

A helpful way to breakdown the question of “How much do I need to retire?” is to calculate how much money you should accumulate at different stages in life. Experts suggest that by the time you reach the age of 30, you should have accumulated an amount equal to your annual income. Further savings account targets are:

Age 40 – twice your annual salary.
Age 50 – four times your annual salary.
Age 60 – six times your annual salary.
Age 67 – eight times your annual salary.

How Long Can You Live Off A Million Dollars?

Clearly, this is a very subjective question with a variable answer! If you plan to retire in San Francisco, 1 million dollars could only last you 8 years. However, if you take the average cost of living for adults over the age of 65 in the U.S. at $50,860 per year, and add to that, the monthly social security benefit of $1,381.79, one million dollars could last over 29 years.

Increase Your Net Worth

Paying off your debt (home loan, car loan, credit card debt) as quickly as possible is a great way to ensure a positive net worth. Then you can start building up your nest egg. Being aware of your personal net worth is the first step to healthy personal finances. The next step is to balance expenses vs. income. Make good habits of regularly checking your expenses and keeping tabs on your net worth so that you can watch it grow!