Determining your net worth is necessary if you want to make significant financial decisions, such as buying a new car or getting a loan from the bank. Continue reading to learn more about what net worth means, how to calculate your own net worth and how to increase your net worth.
What is net worth?
Simply put, net worth is the difference between your assets (what you have) and liabilities (what you owe). It can be a positive or negative number depending on whether you have more assets or more liabilities.
Net worth gives you an overview of your finances, and thus, serves a critical function to make sure you succeed in life. Here are some ways that knowing your net worth can help you:
Decision-Making: When you are facing a significant decision, such as buying a car or getting a new loan, you should check to see if you have a positive net worth and can handle your expenses.
Aside from this, if your net worth is decreasing over time, you might consider investing wisely or avoiding spending your money on things that you currently do not need.
Financial Goals: A lot of people base their success on how comfortable they are living. While there are people who measure their success with how much they earn, this is not an effective method of knowing what your financial situation actually is. Adding your liabilities to the picture helps you get a better understanding of your overall worth and helps you set appropriate financial goals.
How to Determine Net Worth
The net worth formula is: Net worth = assets – liabilities
For people who have very few assets and liabilities, it is easy to compute net worth. But for people who own different houses and have a lot of loans from the bank, the net worth might be a little more difficult to calculate. The following is a simple guide that can show you how to calculate your net worth.
Step 1: Calculate Your Assets
Include all of the following when calculating your assets:
Savings and Checking Accounts: This includes all the money in your savings and checking accounts, including your emergency funds and savings for any future expenses.
Cash: Although most people do not keep a lot of actual cash on hand, you should also include any money you currently have on hand.
Trusts, Shares, and Other Investments: The current value of your investments is also a part of your assets. This includes how much you can trade your investments for if you were to sell them at this moment.
Properties: The current price of your home, vehicles and other properties that you own are included in your assets. One thing you have to remember is that the value of your properties does not depend on how much you bought them for, but how much you can sell them for at the time you calculate your net worth.
For example, if you bought a brand-new car, it will lose its value as soon as you use it. It further loses its value as time goes by or the vehicle becomes damaged
Value of Business: If you are a business owner, the value of your business is also included in your net worth.
Step 2: Compute Your Liabilities
Include all of the following when calculating your liabilities:
Personal Loans: Your base loan plus the interest you need to pay is included in your liabilities. If you have personal loans, they are part of your liabilities.
Mortgages or Property Loans: If you have existing mortgages or property loans, you must add it to your liabilities, including the interest that you have incurred and have not paid yet.
Business Loans: Just like adding the value of your business in assets, if you are the owner of a company, the loans that your business has are also part of your liabilities.
Student Loans: Student loans may be challenging to pay for, especially for a lot of Americans. As of February 2023, the total student loan has reached $1.757 trillion, which makes it the second-highest consumer debt after mortgage loans and affects 43.5 million Americans.
Credit Card Debt: Credit card charges, interest, and fees are all included in your liabilities. If you want to lessen your debts to increase your net worth, you can try to limit your credit card usage.
Step 3: Subtract Your Liabilities From Your Assets
Now that you have the total of your assets and liabilities, simply find their difference, and you now have your total net worth. You can also find a net worth calculator online to help you track your net worth.
Low Net Worth Tips
If you would like to increase your net worth, there are some steps you can take. Here are some ways to start increasing your net worth:
Clear Your Debts: Your debts and loans affect your net worth the most, as they are the factors that lower it even if you have a lot of assets. The interest that you incur on these debts when you do not pay them immediately also lowers your total net worth statement over time. This includes mortgages, personal loans, student loans and credit card charges.
Invest Your Extra Money: Investing used to be difficult and risky, but with many resources online, you can now invest smartly and receive a considerable amount of earnings on any extra money that you are currently not using.
Invest in a High-Yield Savings Account: If you are saving up for a new expense such as a house or a car, you might as well put your money in a high-yield savings account so your balance incurs a high interest over time.
Buy Properties: While buying things seems to be counterintuitive in increasing your net worth, it can be an effective method, especially if you know that these assets will increase their value over time. Some investors buy a piece of land in an upcoming neighborhood that will increase in value over time.