When you hear the term ‘net worth’, what is the first thing you think of? For most people, it’s celebrities, athletes, or other wealthy people. It is a very common misconception that net worth is simply how much money a person has in their bank account. However, there is so much more to net worth than simply your bank account. Net worth can be defined as the value of all the non-financial and financial assets owned by an institutional unit minus the value of all it’s outstanding liabilities. Put in simple terms, net worth is what you own minus what you owe.
The basic formula to calculate net worth is: (assets – liabilities = net worth).
This means if your assets exceed your liabilities, you have a positive net worth. However, if your liabilities exceed your assets, you have a negative net worth. This math is very simple to calculate and it is essential you fully understand your net worth.
Assets and Liabilities
To fully understand how to calculate your net worth, it is important to understand what assets and liabilities are.
Assets are defined as resources with economic value that a person owns. In simple terms, an asset is something that can now, or in the future, make you money if you were to sell it or otherwise provide a benefit. Common assets include securities (stocks, bonds, index funds, etc.), rental properties, cash, or personal property (art, jewelry, vehicles, etc.).
Liabilities are defined as financial debts or obligations (something you owe to someone else). Common liabilities include mortgages, student loans, consumer debt, car notes or anything else you make debt payments on.
Calculating Your Net Worth
You can calculate your net worth by working it out on paper, or using the free spreadsheet download found at the bottom of this post. Start by listing all of your assets and how much they are worth. Once you have them listed, add up the total of how much each one of your assets are worth. Next, do the same for your liabilities. Once you have the total amount of each, subtract your liabilities from your assets (assets – liabilities = net worth) to find your net worth. If the number you get is positive, you have a positive net worth. This is a great thing! For some people, your net worth may be a negative number. While this is less desirable, it is changeable. You can increase your net worth by paying down debts, and beginning to save or invest.
Net Worth Calculator <– here is your free, downloadable worksheet for calculating your net worth.