Is your budget fit and healthy? To find out, calculate your net worth. Your net worth is a snapshot of your financial health. Here’s how to do it.
Calculating your net worth gives you a snapshot of your current financial health and provides a yardstick to measure your financial progress.
Your statement of net worth is similar to a financial balance sheet: it shows your assets and your liabilities, and their net value. It’s this net value – the total value of your assets less the total value of your debts – that equals your net worth. Or how much you OWN own after you take away what you OWE.
If this sounds complicated, don’t be put off by this off. Calculating your net worth is really easy.
To use your statement of net worth, draw it up at the beginning of the year and then again at the end of the year and compare figures.
- Has your net worth increased or decreased?
- Has the value of your assets increased or decreased?
- Has the value of your liabilities increased or decreased?
- And for each of these questions ask yourself why? There may be good answers or bad.
Doing this exercise over the course of several years can be both enlightening and motivating. It’s nice to see progress on paper, especially when you don’t feel like you’re making much progress.
Calculating your net worth
Here is a step-by-step outline to calculating your net worth. For a visual guide, check out the example below.
The first step is to write down all of your assets: everything you OWN (even if they are financed). Divide this list up into personal assets and investment assets.
Next, estimate the value for each asset. Try to be as realistic as possible. What would you REALLY get for that asset if you sold it today? Total these amounts.
Now do the same for your liabilities (all the debts you OWE). List them and the amounts you owe for each one and calculate the total.
Finally, deduct the total liabilities amount from the total assets amount. This is your net worth. See the example below
I have tried to include as many categories as I could think of in the example, you may have different assets and liabilities that aren’t included here. If a category doesn’t apply to you, leave it out.
Some things to Keep In Mind When You Calculate Your Net Worth
Traditionally, net worth is divided into “current assets” and “non-current assets”. Current assets are those that can be turned into cash quickly and easily like cash in the bank or shares. Non-current assets are things like a house.
Why do I divide it into personal and investment assets?
Because it’s a great reminder that some assets EARN money, like dividends on shares or interest on cash in the bank. Other assets SUCK money. Like a car. It depreciates in value and is expensive to run. That doesn’t mean we shouldn’t have a car, but that investing in investment assets can help build wealth.
A key thing that wealthy people do (and that the rest of us don’t) is that they build investment assets. It’s something to keep in mind.
How to Use Your Net Worth to Evaluate Your Budget’s Health
Now that you know how to calculate your net worth, how do you use it?
Firstly is it positive? Do you own more than you owe?
If the answer is no, then don’t despair. You’ve just taken the first step to change that ratio!
If it is positive, by what ratio? By how much can your assets cover your debts? Find out here how to calculate this.
Finally, track your progress by calculating your net worth each year and tracking trends. Is your net worth improving?
If it is you know your budget is a success.