If you can add and subtract, you can determine your net worth.
It’s really very simple: Take the total value of everything you own and subtract what you owe. The result is your net worth.
What you do with that final number is what’s important.
At the very least, it provides a big-picture view of your financial health. You can use it to decide how to spend and save money and spot potential problems or prevent small ones from growing into bigger headaches.
The basics of determining your net worth
We’ll go into much more detail soon, but the basics of determining your net worth are just that: basic.
Add up the value of your assets (real estate, cars, and investments, among others) and subtract your liabilities (mortgage, loans, and other debts).
The hardest part may be tracking down all of the paperwork for your assets and liabilities. A financial advisor can help you sort them out and determine the actual value of each. Once you’ve done your net worth calculation, a financial planner can also help you figure out the next steps in making the most of your money.
In this story, we’ll dive into the specifics of calculating your net worth, get into more on why it’s important, and suggest some ways to help you figure out your net worth over time. We’ll also show how professional help can make it a lot easier.
Why knowing net worth is important
Looking at the bigger picture may help before we get to the nitty-gritty of determining your net worth. If you don’t know why you’re doing something, then it can seem pointless to do it.
Think you’re spending too much money? Is your checking account almost empty at the end of the month, or is it overdrawn? If so, then calculating your net worth may seem fruitless. You already know you’re spending too much.
But figuring out your net worth can still be valuable. It won’t tell you if you’re living within your means or exactly where every dollar goes that you spend. That’s what a budget is for.
It can help you see the bigger picture by looking at general categories of where you spend too much money. And with that information, you can see where unnecessary debt is accumulating and strongly consider if you should buy a new car instead of a used one or fix the one you already have. Even if you can afford a new car, it doesn’t mean you have to buy it.
Paying off a credit card bill a little at a time can take years. A look at how it affects your net worth may spur you to pay it off faster so you can avoid paying more interest and instead put your money in investments.
You work hard to earn a paycheck. Instead of depositing it and watching it drain away each month, an assessment of your net worth can give you a handle on where it’s going in the long term so you can make sure it’s moving in the right direction.
The best direction is up. A positive net worth figure means you own more than you owe. A negative net worth figure means you owe more than you own.
What your net worth won’t tell you
As we’ve explained, your net worth doesn’t drill down as far as your daily expenses. It doesn’t factor in spending on groceries, dining out, entertainment, medical expenses, insurance, and furniture. Those may seem like liabilities sometimes, but they’re regular living expenses in a household budget.
So figuring your net worth won’t show you where to cut costs. At least not daily ones.
Instead, it will show you the total liabilities that you owe. Such as loans.
Your dog’s vet care isn’t a liability if you pay for it in cash. It’s an expense and should be part of your budget.
However, the vet bill can become a liability if you charge it to a credit card and don’t pay the credit card bill off when it’s due. Using revolving credit on your credit card is a form of credit card debt and is calculated as a liability when determining your net worth.
Steps to determine your net worth
To start, you need to find out how many liabilities (debts) and assets you have. Then you subtract your liabilities from your assets to get the dollar amount of your net worth.
An online net worth calculator can help, though you should do it yourself on a spreadsheet.
Add up your assets
An asset is anything you have of significant value. They’re also called liquid assets. When listing homes and vehicles, find the market value in today’s dollars. You’ll also need your latest statements for your liquid assets, such as bank and brokerage accounts.
Here are some of the main assets to list, with each broken down into specific assets:
This includes the market value of your home and any other real estate you may own outright or in which you are paying a mortgage.
Think about your significant possessions here that are worth $500 or more. Examples include:
- Value of your cars
- Other vehicles such as boats
- Heirlooms and collectibles
- Household items such as furniture
- Value of business you own
Find today’s value for all of the investments you have. They may include:
- Retirement accounts (401(k)s, IRAs, and taxable savings accounts
- Mutual funds
- Savings bonds
- Cash value of life insurance
These include any cash you have, including in bank accounts such as:
- Checking accounts
- Savings accounts
- Emergency fund
Add up your liabilities
Liabilities, or debts, are any money you owe a bank or someone. If you borrowed some cash from a friend, it’s a debt. Liabilities fall into two categories:
Include a home mortgage and any other mortgage for real estate you own. Don’t include property taxes, homeowners insurance, and home expenses.
Loans and debt
These usually include:
- Car loans
- Student loans
- Credit card balances
- Payday loans
- Personal loans
- Other loans
Subtract total debts from total assets
The final step is to take the number of your total assets from the first step and subtract the entire debts and liabilities from step two.
Suppose you have $100,000 in assets and $40,000 in debts. The calculation would be:
100,000 - 40,000 = 80,000.
Your net worth would be $80,000. That’s positive net worth.
You can also have a negative net worth. This happens if you have more debts than assets.
For example, if you just started your career and have $25,000 in student loan debt and $5,000 in credit card debt and $5,000 in your checking account, and $10,000 in a savings account, you have $30,000 in debts and $15,000 in assets. Your calculation would be:
15,000 - 30,000 = (15,000).
You’d have a negative net worth of $15,000, meaning you have $15,000 more in liabilities than you do in assets.
There’s nothing wrong with that. You can improve it by paying off your student loans as quickly as you can. Once you do, you can put that money in a savings account instead of having a loan to pay off anymore.
What to do with your net worth figure
In theory, the net worth figure you come up with in the net worth calculation is the value in cash you’d have if you sold everything you own and paid off all your debts.
A negative number means you have more liabilities than assets. This is common for recent college graduates or anyone starting their careers.
Whatever your net worth is, computing that number every year is a way to track your progress and see if you need to make changes.
Like the stock market, your net worth will change over time. As you grow older, pay down debt, build equity in your home, and acquire more assets, your net worth will likely increase. It can start dropping during retirement as you pull money from your investments for living expenses.
Reviewing your net worth regularly may encourage you to make changes to your finances. You may want to save more for retirement or can now more clearly see the benefits of paying off any personal loans early.
Or maybe you don’t have an emergency fund and decide that now is the time to do it. Perhaps you don’t have many liquid assets (meaning you can sell them quickly) and want to change your investment mix.
Determining your net worth can also be a good reminder to start a budget if you don’t already have one. A household budget will be more detailed than a net worth calculation and show you where you may want to cut expenses.
Where to get help
Budgeting software can help you figure out your net worth as often as you want. Once a year is probably enough for most people. It can be a good time to do it when you’ve added some assets or debts, such as a new car loan or gaining an inheritance.
Free financial tools are available at Personal Capital, a digital platform that helps users see the big picture of their finances and set goals for a better financial future. Personal Capital has a free and a paid version that can be used on a browser or an app.
Its free tools include a savings planner, retirement planner, cash flow charts, and a hidden fee analyzer.
The site helps users see their spending habits, net worth, and investment portfolio in one convenient dashboard.
Determining your net worth on your own is free. Once you’ve gathered your latest financial statements, you should be able to do the calculation reasonably quickly.
Free help is also available at Personal Capital and other companies. Personal Finance also offers extra services to clients, depending on the total value of their assets invested through Personal Capital.
For the first $1 million invested, fees are 0.89%. From there, they drop with more money invested:
0.79% on the first $3 million
0.69% on the next $2 million
0.59% on the next $5 million
0.49% on anything over $10 million
Pros and cons
- Calculating your net worth can help you see the big picture of your finances, making it easier to decide where to make changes.
- It’s a quick and straightforward calculation to make after gathering bank statements and other records.
- Determining your net worth may help you decide to start a budget so you can track expenses easier.
- It may be a little depressing to see a negative net worth.
- Seeing all of your debts in one spreadsheet can be overwhelming.
- You may need to hire a financial planner after reviewing your financial situation. This can turn out to be a good thing, however.
The bottom line
Maybe you’ve never wondered if you could pay off all of your debts by selling nearly everything you own. That’s what figuring out your net worth will tell you — if you own more than you owe or if the opposite is true.
Either way, determining your net worth is a quick calculation that requires a little bit of prep work in gathering financial documents and researching how much your significant possessions are worth.
But once you’ve done it, you may never look at your financial life the same. By getting the big picture of your finances, you can better decide where and how to save more and if you can afford to buy a home. A household budget will help too by showing you your actual expenses, but a net worth calculation can make it easier by giving you a view from above.