What is your net worth? If you blink and can’t answer the question in a second, you need to up your net worth tracking skills. Be informed of what $ amount stands against your name.
I’m not sure why speaking money and investments is a taboo in my circle. People like to have fun and when you want to have a serious conversation in between, that never happens. Only one in 10 of my friends would be interested in talking money and investment. Your circle could be different than mine.
It is shocking only 5 out of 100 humans on earth know their actual net worth. I’m proud of my friends circle which seems to perform twice the amount of average. For sure, not a lot of people are genuinely interested in money, investment or planning for retirement.
Whenever someone tells me they are better without knowing how much debt they possess, what is their savings rate or how their investments increase net worth over time, I can’t help but tell them how maintaining them in a simple spreadsheet has greatly improved my life. Obviously, they ignore my boring advice. What did you expect?
What becomes more shocking is that, when I ask them to take a guesstimate of their net worth, they just throw me a blank face and say they have no ball park range to think of. Or, they playfully quote something that doesn’t make any sense, just for humor.
Knowing how to calculate net worth can help you in tricky financial situations. Net worth is the ultimate standard of measuring what one is worth in monetary terms. You need to be aware of it, at all times.
Why Know your Net Worth?
Knowing your net worth certainly helps you see the complete health of financials in your life.
- Manage financials better
If you track your net worth every month, you might become more careful about where you spend excessively. Scrutinize your spending and category, you will find some real info to cut down. Live a debt free life as much as you can and make sure you net worth doesn’t become negative at any point. If you get disappointed your net worth is not to the level you hoped it would be, you will start taking progressive steps to achieve your goal.
- Stress on Liabilities
Most folks only worry about how the performance of their assets but never think about liabilties. Net worth gives them a chance to increase their vision on liabilities and truly understand the complete picture. You might be thinking you’re well but you could be surprised. Try to cut your liabilities quickly on depreciating assets and high interest debt
- Knowing your net worth stops you from cheating yourself
You might be cheating yourself by taking impulsive decision not knowing how much it sets you back. But now, since you know your net worth, you know the consequence of your bad decisions. Possibility of reducing them is high.
- Making passive retirement progress
When you track your net worth, you might be making retirement progress passively without any additional effort. When you save more, little drops make up an ocean.
Net worth is the accurate measurement of your success level in monetary terms. At the least, know your ball park range of net worth where you stand.
How To Calculate Net Worth?
Thankfully, calculating is not a rocket science. It’s just a simple math and read more to accurately estimate your net worth. You can calculate your net worth by using the following uncomplicated guide
Attain a complete picture of what makes networth
Before we get to the actual simple math, you need to understand two simple concepts. Assets and Liabilities.
- An asset is anything that contains economic value with or without future benefit
- An asset can often generate cash flows in the future, such as a piece of machinery, a financial stock or bond, music album or a patent.
- A liability is the amount owed to a person or a business in the form of cash or securities.
- The Liability can be cleared up after some time by just repaying the amount owed back
- Liability is a future payment waiting to be paid to individual or business but has not yet been paid
Now that we know the difference between asset and liability, let’s go on our journey to find our net worth.
In most cases, your worth is simple subtraction: your assets minus your liabilities.
To compute your networth, the first step is to collect all the assets you own and liabilities you owe.
If you think it is a real struggle, try to engage a no-commission financial advisor, who puts your best interest rather than their commission. They generally charge a consultation fee and never have any affiliate products and push you through them.
Make sure to include all assets
Most of us may miss some important assets, even after thinking hard. In order to not miss anything, you need to ponder and incorporate anything that has worth. Do not miss to include important things like retirement account (like Roth and 401K with employer match).
You may want to add tangible things (think of your personal car), even if it is has a loan on it. In this case, you will add the value of the car to asset and the loan towards liabilties
Fun Fact : I have 92 different assets, that I track every month, on my spreadsheet
Just waiting for the month when I can expand my assets column to 3 digits. I will fist pump in air and celebrate alone in Covid-19 time and then get back to thinking how I can expand this further next month.
Note down your liabilities
It is now time to actually list down your liabilities. Do you owe dollars to someone or something? Yes, that’s your liability right there. It can be anywhere. You may owe something back on your revolving balance in credit cards or a mortgage or a personal loan.
Many people make a mistake by adding their regular expense for a month into liability. Please do not. Expense != (not equal to) Liability .
If you think you have debt from multiple accounts and it is getting out of hand tracking them, then opt for a debt consolidation loan. Now, you have it in one place and that big amount will scare you and make you more responsible.
Apply the simple math
Take the sum of all assets and the sum of all liabilities and then subtract them. Tada!, you got your net worth at the current time.
Just to help you with an example, Nick has $10K savings, $100K investments and a beautiful sedan worth $20K. Total assets Nick owns is $130K.
After doing some impulsive purchases, his credit card has a revolving debt of $3K. Let’s assume he’s in the midst of paying back his $47K university loan, which makes his total liabilities amount to $50K.
So, Nick’s has $130K in assets minus $50K in liabilities, which makes his net worth $80K. Nick has a total of $80K to his name.
Ponder how to increase net worth
Now that you’re done with the difficult math (just kidding), it is time to think to formulate a strategy to keep growing net worth. When you have a strategy, you will see the health of your finances making some progress.
Concentrate more on attacking liabilities. Consolidate or pay debts if you can afford quickly. Diversify assets and strengthen it. Learn how to invest in stocks, bitcoin, real estate and gold.
Aim for the sky. There’s Bezos at the top with $186B, according to Bloomberg billionaire index
Can Net Worth Be Negative?
You have nothing against your name (in $) if you have the same amount of assets and liabilities.
Another example, if someone has $100K in liabilities and they count $50K assets against their name. This means, you have no wealth and your net worth is -$50K. Don’t even dream you can’t have a negative NW. It is completely possible if you have more liabilities than assets.
If you have it negative, make sure you put active effort into becoming debt free as soon as possible. Debt keeps you up at night and has a negative effect on mental health too.
What Is The Right Frequency To Calculate Net Worth?
I always look at my worth when the month begins for the previous month. I feel doing it monthly is the best cadence to check how your net worth has changed. Having a full view of your expenses and your NW at the same time will help you improve yourself.
There may be huge fluctuations between months if you invest in Cryptocurrency or Stock market may swing heavily to the extremes, or the value of your home changes drastically, or your car value dropped at the beginning of a new year. So don’t be worried by small month on month movements. Have a net worth goal for the year and achieve it at the end of the year.
How to increase your wealth fast?
Whatever is your level of assets and liabilities, you still need to think on how to grow the assets. If the NW is negative, first concentrate on getting it on the positive side, by paying off the debt quickly. You should hate debt to the core to do it.
To increase net worth fast, you can make one of the following changes to your situation
- Discover paths to increase your income
- Prioritize paying high interest debt
- Meticulously plan budget and stick to it
- Invest your money
- Increase your savings rate
Let me know in comments what strategy you used to grow your net worth fast!
I am a data analyst by profession who loves to crunch numbers at daytime and come home wondering how my passive income numbers for the day look like. I believe in being rich rather than looking rich. Follow me for Cryptocurrency, FIRE, Personal Finance, Credit Cards and Digital Nomad updates