It might seem like a bit of a vanity-based exercise, but understanding your financial health is key when it comes to planning for and making informed decisions about your future – and one of the most obvious ways to get a clearer picture of your financial standing is to assess your net worth.
Calculating your net worth will provide you with valuable insight into your assets, liabilities, and overall financial stability and offer a snapshot of your overall financial landscape. And, by gaining an understanding of your financial standing, you can map out a clearer path towards gaining control over your money and working towards those important long-term goals.
Here, we take a look at how to accurately calculate your net worth and just why it’s a crucial step in achieving your financial goals, serving as a foundational tool for financial planning and wealth management moving forward.
What is net worth?
In short, your net worth is defined as the measure of your financial position and is calculated by subtracting the sum of your total liabilities from your total assets. For some, this can be an eye-opening exercise and can reveal that after debts have been accounted for, there isn’t as much left as they’d imagined – but for others, it’s reassuring to see that their net worth is at a comfortable number and that their liabilities are at a minimum.
A positive net worth determines that your assets exceed liabilities, while a negative net worth reveals the opposite. With this in mind, net worth is a crucial metric for assessing your financial stability, and will allow you to decide upon your next moves based on solid data.
Identifying your assets
The first step when it comes to actually calculating your net worth is to determine your assets. Make a list of all of your cash, savings and investments, as well as any vehicles, real estate and valuable possessions you own, assigning monetary value to each not based on what you bought them for but on their current market value. You’ll also want to include any pensions and their vested balances, as well as the cash value of your life insurance policy, when totting up the total amount your assets come to.
Calculating your liabilities
Now comes to the less fun part – working out the total sum of your liabilities. For some, this may mean facing some uncomfortable truths, but it’s an essential step in working out your total net worth. On the contrary, you might find that you’re pleasantly surprised, but until you do the maths, you simply won’t know.
Start by writing down any mortgage debt and all of your loan and credit card balances, if you have any. Include any other financial obligations, such as personal loans or medical debts, too.
Calculating your net worth
One of the simplest ways to calculate your net worth based on the information you have is with the Prillionaires net worth calculator – but you can also do the job yourself with relative ease.
All you need to do is subtract the total value of your liabilities from the total value of your assets, and you have your magic number.
What does your net worth actually mean?
To be best understood, your net worth should be interpreted in the context of your financial goals and lifestyle. Look at how your net worth compares to the benchmarks for your age group and see whether you’re on track for your long-term goals or whether some work needs to be done to get you there. You can also look at your progress in relation to others in your income bracket, and examine trends in your personal net worth over time to see where there are areas for improvement.
Strategies to increase your net worth
Working out your net worth is almost always revealing in some way or another, and even if you’re happy with your current position, putting some strategies to increase the number over time is a wise move to ensure you continue moving forward when it comes to your financial health and goals.
There are myriad ways to grow your assets, so consider investing in stocks and shares, purchasing bonds, or investing in real estate – or investigate how to leverage additional and passive income streams to your advantage. If debt has arisen as an issue when determining your current financial picture, then consider implementing debt reduction strategies to gradually decrease your liabilities, as this will improve your total net worth over time.
Reviewing your position
Working out your current position isn’t something to be done once and then forgotten about; the process is designed to help you make progress towards your goals and thus, your net worth and the strategies you’re using to improve it should be reviewed periodically to ensure that you’re continuing to move in the right direction. As your assets and liabilities change, you should update your net worth calculation to ensure you always have an up-to-date picture of where you’re at, and in doing so, you’ll be able to adjust your strategies as required.
