When it comes to calculating net worth, there are many people who are of the opinion that ignorance is bliss and there are also many people who absolutely love doing it. Regardless of what your viewpoint is, it is a really important exercise to do to get a clear view of where you currently stand financially. Not only that, calculating your net worth can help you determine what areas you need to focus on to get your numbers up.
So what is net worth?
Your net worth is simply your assets minus your liabilities. Your assets are the things you own, for instance, your home, savings, investments and other valuables while your liabilities are the things you owe or in other words debt your mortgage, student loans, credit card debt and other types of debt.
How do I calculate my net worth?
Your net worth is calculated by subtracting your liabilities from your assets.
Net worth = Assets - Liabilities
You can do this on a simple spreadsheet or paper on your own by making a list of all your assets and totaling their value up and then doing the same for your liabilities. Once you have a total number for your assets and also your liabilities, subtracting that total liability number from your total assets number will give you your net worth. There are also many calculators online that can help you too.
Help - My net worth is negative!
Many people start out with a negative net worth and if this is you, it is ok. Given time and the continuous of practice good financial habits, this can change. A negative net worth can be due to the fact that you haven't earned/invested enough of your income to offset your debt. For example, it is not uncommon for younger people who have student loans but have only earned a few years of income to have a negative net worth.
Another example of a negative net worth could be due to overspending and having large amounts of credit card debt and not much in terms of assets to offset the debt.
How do I increase my net worth?
Every time you make a payment towards debt or you put money in your savings account, you are increasing your net worth. Even if it remains negative for a while, when you make a debt payment you reduce your total amount of debt which in turn increases your net worth. So don't be afraid or discouraged by what you see if you end up with a negative number.
It's a good idea to track your net worth month or every couple of months so you can see the progress that you are making. Remember building wealth takes time and is a journey. Make it a goal to develop good financial habits, stay consistent with your debt pay off, savings and investing and most importantly believe that you can.