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
- How Stocks and the Stock Market Work
- How Debt Works
- How Debt Consolidation Works
- How Buying a House Works
- How to Buy a Car
- How Mortgages Work
- How Credit Reports Work
- How 401(k) Plans Work
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/