When you were younger, did you ever wonder if you'd amount to anything? Although it may be hard to quantify your true worth, it's easy to quantify your finances. If you've never done it before, perhaps it's time to take inventory and find out exactly how much you're worth. Calculating your net worth will give you an accurate picture of where you stand financially.
Net worth is a single amount representing how much money a person would have if he sold all of his assets and paid off his debts. Unless you plan on shedding yourself of every material thing in your life right now and starting anew, you probably won't ever act out this scenario. So, why consider it at all? If you have any financial plans for the future -- say, buying a house, sending a kid through college or retiring -- it's especially important to know your current financial state. As the saying goes, you never know how to get somewhere unless you know where you are right now. Knowing your net worth helps you make better decisions on how to accomplish your financial goals.
Determining your net worth involves taking a good hard look at all aspects of your finances -- the good, the bad and the ugly. This means that you may not come out ahead when all is said and done. Prepare yourself for the possibility that the final number will be negative. A negative net worth means that you owe more than you own. A hefty mortgage, student loans or steep credit card debt could send you down into negative territory. But, take heart; there are several avenues out of debt that we'll discuss later.
Hopefully, you'll come out ahead with a positive number. A positive net worth means you own more than you owe. Getting a positive number doesn't mean you should just pat yourself on the back and forget about it. Using your funds wisely helps you reach your financial goals sooner.
So, how do you determine what you're worth? It's a pretty simple process. So let's distinguish what counts as an asset and a liability on the next page.
Assets and Liabilities
Your net worth is a snapshot of your finances. The picture will change slightly the next time you pay a bill and again, the next time you receive a paycheck. To determine your current magic number, the first step is to take a look at all of your assets, which are anything of value that you own. Make a list of all these items and next to each, list the amount it's worth. These typically include:
- Cash -- any physical currency and coins you have
- Funds in the bank -- all the money you have in a savings, checking, or money market accounts, and any certificates of deposit (CDs)
- Stocks, bonds and mutual funds: also list savings bonds
- Retirement accounts -- includes 401(k) funds, IRAs and any other retirement accounts
- Life insurance -- counting any cash value you have in the policy
- Motor Vehicles: the current blue book value of any cars, motorcycles, boats, RVs, etc.
- Real Estate -- the current market value of property (house, condo, land, etc.) you own, even if you have a mortgage
- Personal Valuables -- including the market value of jewelry, collectibles (from baseball cards to art) and furniture
- Money you're owed -- as long as you have a reasonable expectation of being paid back [source: Sahadi]
In reality, just because you own these assets doesn't mean you'll be able to access their monetary value today. Only cash and other highly liquid assets -- things that you can exchange for a good market value quickly -- are easily accessible. Although it might take months to turn real estate into its true cash value, use the full market value when calculating your net worth today. If you're unsure of what something you own is worth -- like an antique -- is worth, find a professional appraiser.
When you're done listing assets, make a separate list of liabilities and amounts. Liabilities are any debts or payments you owe to someone else. Here are the most common:
- Mortgage -- the principal or amount you have left to pay on your mortgage(s)
- Home equity loan -- how much you owe if you have a home equity loan
- Automobile loan -- the amount you have yet to pay on your car(s) and other motor vehicles
- Student loans -- the amount left on student loans
- Credit card debt -- any balance owed to a credit card company
Once you're finished taking stock of all of your assets and liabilities, it's time to calculate the magic number. Read the next page to find out how.
Calculating Your Net Worth
Now that you've gathered all the information about your own assets and liabilities, you may find the next part easy. You'll simply need to add up all of the amounts listed under assets, and separately, add up all of the amounts listed under liabilities. You should end up with two numbers: a grand total of assets and a grand total of liabilities. Finally, subtract the total liabilities from the total assets -- and, voila! You have your net worth.
The formula can be expressed simply as:
Net worth = assets - liabilities
As simple as this calculation is, take it with a grain of salt. This single number doesn't paint an accurate picture of your whole financial situation. For instance, if you're a recent college grad and are just starting to pay off hefty student loans, a very negative net worth is expected and doesn't necessarily reflect badly on your finances. However, it does mean that to realize financial goals soon, you'll have to work to pay off those debts quickly.
If you're older and worried about negative net worth, it's time to take more dramatic steps to get out of debt. This includes making a budget and restricting unnecessary spending. Dedicate larger and more frequent payments toward paying off debts. If you're considering debt consolidation, realize that this will probably mean taking on a higher interest payment and could put you in deeper debt for longer, if you're not careful.
If you find you have a positive net worth, consider investing if you haven't already. No matter if you have a positive or negative net worth, it's important to consider your personal financial profile when moving toward your financial goals. This will mean periodically recalculating your net worth to see how you're doing.
Net worth isn't just useful for personal finance. Some economists look at the net worth of the public to understand the financial health of a nation. The U.S. Federal Reserve studies the average net worth of Americans. When the housing and stock markets suffer, so does the average net worth, as assets that people hold, like homes and stocks, decline in value.
Take a look at the next page to find links to more articles on money and debt. You'll find a calculator to help you determine your net worth and a tool to compare yourself to other people in your income and age bracket.
Related HowStuffWorks Articles
More Great Links
- "Calculating Net Worth." PathtoInvesting.org. Foundation for Investor Education and Lightbulb Press, Inc. 2006. (July 17, 2008) http://www.pathtoinvesting.org/calcs/networth_worksheet.pdf
- "Median Net Worth Declines." All Things Considered. National Public Radio. July 3, 2008. (July 17, 2008) http://www.npr.org/templates/story/story.php?storyId=92204506
- Luhby, Tami. "Americans $1.7 trillion poorer." CNNMoney.com. June 5, 2008. (July 17, 2008) http://money.cnn.com/2008/06/05/news/economy/fundflows/index.htm?postversion=2008060516
- Sahadi, Jeanne. "How much are you worth?" CNNMoney.com. Aug. 20, 2004. (July 17, 2008) http://money.cnn.com/2004/08/10/pf/millionaire/net_worth_stackup/