The 3-Step Process to Calculating Net Worth

Let’s talk about net worth. Net worth is important.  Net worth is a number that represents how much money you have and how much you own. It is a total picture number. It is easy to convince ourselves we own more than we do, and knowing your net worth helps to keep that knowledge in check. Knowing your net worth is the key to making progress on your finances. Increasing your net worth is the key to reaching your goals. You can’t increase what you don’t know.

Because here’s the thing.: You need money. Money allows you to live the life you want, accomplish your goals, and do good.

If you want to volunteer your time, money allows you to hire a house cleaner so you can spend the time you would be cleaning your house volunteering, it allows you to afford to get to where you will be volunteering if it is outside of your home, it allows you to get supplies you may need to volunteer in a way that will be fulfilling and helpful.

If you want to quit your job, money in the form of financial independence allows for the sense of security and confidence that you won’t end up on the streets, and you will continue to be able to pay your bills.

If you want to start a business, you need money to invest into the startup expenses so that business can be successful.

I could go on. Money does good, and people need money. Chances are, you don’t feel like you have enough money. Most people don’t feel like we have enough money, especially if they don’t know where their financial situation currently stands. For some people, it is incredibly eye opening. It may reveal you have a lot more money than you thought. Or it may be really scary, revealing your debt is much larger than you realized. Either way, you can’t go forward if you don’t know where you are. Calculating your net worth will tell you where you are. The bigger your net worth, the more money and value you have.

Pull out a pen and paper, and follow these 3 steps to calculate your net worth:

1. The first step in calculating your net worth is to add up all your assets. An asset is anything that you own that can be converted into cash (as well as cash itself).
   • Start by adding up your fixed assets. These are the physical items you own, that would take work to turn into cash. Look at everything from your house, furniture, car(s), to your clothes, jewelry, electronics – whatever you could get money for today. Use the present-day value – the amount of money you could expect to sell it for today – not the amount you paid for it. With the exception of real estate, almost everything depreciates in value as soon as you buy it. If you are trying to do this quickly, come up with a rough estimate of all your possessions. If you have the time and inclination, getting as accurate as you can will help give you the clearest picture.
   • Next, add up your liquid assets. This is your savings. Include all money that is in your name. Add up cash, savings, investments, and all retirement funds.
   • Add up your fixed assets with your liquid assets to get a value of total assets. This is the amount of money you currently own.
2. Next, add up all your liabilities. A liability is defined money you owe to someone. Be warned: While the value of your assets can be liberating, calculating your liabilities can often feel scary and defeating. Don’t let this stop you! It’s an important number to understand, because that’s the only way you’ll be able to make substantial forward progress. Calculating your total liabilities includes anything from the $5 you borrowed from your coworker for lunch last week to your mortgage (only include your mortgage if you included the value of your house in your assets). Mortgages (including equity lines of credit), car loans (again, include the value of your car in your assets), student loans, personal loans, medical bills, tax debt (money owed to the IRS), and credit card debt are the most typical types of liabilities.
3. The final step in determining your net worth is to subtract your liabilities from your assets. If your liabilities are greater than your assets, you’ll have a negative net worth. If your assets are greater than your liabilities, you’ll have a positive net worth.

The higher your net worth, the closer you are to financial independence. Seeing this number for the first time can either be a really scary experience, or it can be an enlightening and motivating experience. In either situation, understanding where you are currently at is the first step to moving forward in the direction you want, and using your hard-earned dollars to carry out your dreams.