Knowing and understanding your net worth is the first step in navigating your personal finances. Net worth gives you a point in time snap shot of the monetary value of all that you own less what you owe. This is probably the most important number related to personal finance. It’s the perfect benchmark to demonstrate where you stand financially at any given time. Once calculated, you can use your net worth to set your financial goals, monitor your progress against those goals, and measure the growth of your wealth over time.
Net worth can be a scary number to calculate, especially if you have significant student debt, a new mortgage, or other borrowings. However, it’s probably best to bite the bullet, swallow your pride, and take a hard look at where you stand financially today. You would much rather do this now than a few years down the road when there is more on the line and less time to initiate a change.
To calculate your net worth, make a list and record the value of all of your assets. Assets include your savings accounts, checking accounts, retirement accounts, currencies, Venmo balances, brokerage accounts, stock ownership, real estate, etc. Then write down and record the balances of all of your liabilities. Liabilities are the opposite of assets and include your credit card balances, student loans, mortgages, IOU’s, etc.
There are a few things you should keep in mind when listing your assets and liabilities. First, your list of assets should not include material possessions such as your new couch or designer watch. These items are considered depreciating assets, or items that continuously lose value. While these things may have cost you a significant amount of money, they lost a large portion of their value as soon as they left the store, and will continue to lose value over the time that you own them. Cars are also depreciating assets and I would recommend that you not include them in your net worth calculation.
Secondly, your list of assets should not include items that you do not outright own. For example, if your parents bought you your condo (lucky you) and would expect to receive sale proceeds once you decide to sell it, the condo is probably considered their asset and not yours. Similarly, if your grandmother set up an investment fund in your name that you will receive in ten years, this isn’t quite your asset either.
It might be a bit daunting (and challenging) to determine all of your assets and liabilities but take your best stab at it. Keep in mind that this will be an ever changing list that will evolve and improve as time passes. There is no pressure to have it 100% correct the first time.
Once you’ve completed your list of assets and liabilities, subtract the sum of your liabilities from your assets. This value is your net worth. Congratulations, you’ve set your benchmark!
