A step-by-step guide on how to calculate your net worth. The article also includes tools and templates to help you automate the process.
Calculating your net worth can be a bit tricky. But it’s a worthwhile exercise, especially if you’re trying to meet certain financial goals.
Figuring out your net worth for the first time can be scary, especially if it’s a great big negative number. But it’s worth taking the time to track your net worth on a fairly regular basis. It helps you get a handle on where you are financially, and where you need to make changes.
Here, we’ll talk about why you should calculate your net worth and how to do it.
Why Should You Calculate Your Net Worth?
First, let’s talk about why you should calculate your net worth. That’s the point? Especially since this exercise might take you a couple of hours the first time you do it.
Actually, there are plenty of great reasons to put this number on paper. None of them has to do with comparing yourself to your neighbors. After all, you don’t really know their net worth, anyway. Maybe they drive fancy cars that are financed up to here. Or maybe they look broke because they spend no money, which means their savings accounts are flush.
Really, it’s none of your business.
With that out of the way, let’s talk about good reasons for calculating your net worth:
- It’s an accurate measure of your financial health. It’s easy to think of wealth as a number on a savings or investment account. But if you have $1 million in savings and $750,000 in debts, are you really rich? Probably not. Calculating your net worth gives you a better picture of your overall financial standing.
- It can motivate you to keep making progress. If you’re trying to get out of debt, seeing your debts get smaller each month is great. But seeing your net worth rise is even more motivating. And once you start tracking your net worth into positive numbers, it’s even better.
- It shows you the real value of your assets and liabilities. It’s easy to get a skewed picture of the value of your assets and of the seriousness of your debts. When you have your net worth, you’ll have a total picture of how these items relate to each other. If you have $30,000 of debt and a -$25,000 net worth, you’re not in great shape. But that same $30,000 of debt looks a lot different if your net worth is $150,000.
These are just three reasons to calculate your net worth. You may have others. But these reasons are enough to get started.
But What Is Net Worth?
In essence, your net worth is the value of all your assets minus the value of all your liabilities. In simpler terms, the equation is this:
Assets – Debts = Net Worth
So if you decided to sell everything today, settle all your debts, and move to Aruba, what would you have to live on?
Sure, that’s not likely to happen. But as we discussed above, having a handle on your net worth is helpful for a variety of reasons.
Calculating net worth seems fairly straightforward. And, really, it is. But there are some caveats to consider, as well. Let’s talk about those now.
Caveats in the Calculation
The real reason to track your net worth is to track your progress towards your financial goals. So it’s not essential that you get the net worth calculation exactly “right,” whatever that means. But you do need to establish your calculation up front, and use that same calculation each month or year.
So what decisions do yo uhave to make up-front? Here are some to consider:
- Your primary residence: Some people prefer to include their primary residence — both the mortgage balance and the value of the home — in their net worth. Others exclude the house from the equation. Either way is fine, as long as you’re consistent. If you’re trying to become mortgage-debt-free, you’ll probably want to add the mortgage and the value of the house to the equation.
- Your personal belongings: You can include everything you own, down to the last teaspoon, in your net worth calculation. This gets tedious, but it can be done. However, this might give you an inflated sense of your net worth. Sure, your spoons and clothes and power tools are worth something. But what would you really get for them if you decided to liquidate all of your assets tomorrow? Probably not much.
- Your vehicle: Again, you can choose to track your vehicle in this equation, or not. If you do, be sure to check out its current value each month when you’re running the numbers. You’ll probably be shocked at just how much the value drops from month to month!
- Fees and penalties: Some people take things to the extreme by looking at what would happen if they even liquidated retirement accounts immediately. So they put a negative into the calculation for what they would owe the IRS if they cashed out a 401(k) or IRA early. This is a little nit-picky, but, again, it’s up to you.
- How often you track: Finally, you’ll need to decide how often to track your net worth. It’s a good idea to do it at the same time of month or year. That way, your recent payments on debts and deposits into savings and investments are taken into account, and you have a more accurate picture of where you stand.
Again, the details are really up to you. The key is to be consistent in how you decide to run this calculation.
Now that you know what to include in your net worth calculation, here are some tools to help you actually get it done.
Tools for Calculating Net Worth
Of course, you could just do this the old-fashioned way. Get out two sheets of ruled paper. Label one “Assets” and one “Liabilities.” Then, start looking up account balances, property values, and all the other information you need. Add up all your assets and all your liabilities. Then, subtract your liabilities from your assets. The number left over is your net worth.
You could do it that way. But where’s the fun in that when the internet is full of great tools? Here are a few to check out:
- Net Worth Calculator: This calculator gives you a huge list of assets and liabilities to fill in. It’s a great place to start if you’re worried you’ll forget something.
- Net Worth Projection: This calculator lets you project your net worth over time if your assets and liabilities grow due to interest. The numbers may not hold true in real life, but it’s an interesting exercise, nonetheless.
- Google Sheets Net Worth: There are actually several Google Sheets templates for net worth. But this one is nice because it lets you track year over year and month over month results. This is great if you’re working towards some specific goals.
- Mint.com: Mint has long been one of my favorite money management tools. If you want to get a general overview of your net worth, it makes it easy. Just link up all your accounts and manually add balances to any that you don’t. You can also add property values for your home and car or other assets. It’ll track your net worth for your automatically.
- Personal Capital: For a more in-depth net worth tracker that also tracks your investments, Personal Capital is an even better option than Mint. Again, you can link up your accounts but manually enter property values, etc. for better results.
- Net Worth Comparison Calculator: Okay, so we said that calculating your net worth isn’t about comparing yourself to others. But if you’re trying to set financial goals, it helps to know where you stand in comparison to “average.” This calculator shows the median net worth for people of your age and income bracket. Don’t base all of your financial goals on this, but it’s interesting.
Figuring out how to calculate your net worth and then doing it is a great financial exercise. For those getting out of debt, it can be a painful one. But it’s always revealing. And it’s an excellent way to track your progress as you journey towards financial freedom.