One of the things I am publicly tracking on my Net Worth / Wall Chart posts is net worth. Here I want to explain what net worth is, and also how you calculate it.
To calculate net worth, all you need to do is add up your total value of your assets, and subtract the total value of your debt.
Why Track Net Worth at all?
Before I go into the details of how you can go about calculating your own net worth figure lets talk about why it’s important to track net worth in the first place!
It gives you an accurate look at what your wealth looks like today.
You might have student loans still, but your checking and retirement accounts are growing because of your great new job. Net worth helps you cut through the clutter and see a simple reflection of your current financial state.
Tracking it over time is a great way to see progress.
If something happens and your net worth number has gone down in the last 6 months, you can figure out what you’ve been doing and how you should best react. Have you taken on new debt but don’t have any assets to show for it? Has the stock market taken a hit? (it has here at the end of 2018!I) But on flip side, seeing positive changes in Net Worth suggest that you’re doing something right…. Or you’re experiencing the benefits of a stock market boom!
It’s not all about income.
Calculating net worth takes the pressure off of securing a high income, and places importance on what you can do to make sure you KEEP that money. That’s really what the margin studies blog is all about!
Puts your assets and debt load into perspective.
You might be proud of your $300,000, but if your mortgage is still $290,000, the house is only adding $10,000 to your total net worth number.
Calculating Net Worth.
Alright, let’s actually calculate this thing. There’s nothing to really worry about here. The number might not be large, but knowing where you are today will help you make decisions about where you move towards tomorrow.
Add up the value of all of your assets.
For me, assets are anything you own that have a monetary value, however some people argue about what’s actually an asset and what isn’t.
Robert Kiyosaki, in Rich Dad Poor Dad, says that an asset is anything that you own that puts money into your pocket. Put a different way, anything that you own that pays you over time or produces cash flow. This is the definition I like to use as I look to build website properties or look for ways to spend my budget’s margin every month. For calculating net worth, however, I like the expanded definition that calls it anything of monetary value.
Assets are what you own that have a monetary value, that can be broken down into a few different categories.
- Cash — Add up the amount of money you have in Checkings, Savings, or CD accounts, as well as any cash you may have in your wallet, or under your mattress.
- Physical Assets — Add up the value of the THINGS you own. Things like your house, your car, the gold bullion that your paranoid uncle finally convinced you to purchase, your collectible pokemon cards, beanie babies and old ipods that you never threw away. This category can be pretty expansive, but go ahead and put a rough estimate on these things.
- Investments — Add up the value of your investments. This can be your 401k, 403b, brokerage accounts, but also the cash value of your life insurance, failing cryptocurrency coffers, and other business equity investments you may have.
Ok, so add up all of those, and then celebrate. Congrats you have things! Next we get to see how long we are actually able to celebrate.
Adding up what you owe.
So this one isn’t as fun. But it’s time for us to take a look at our debts, and how that’s affecting our total financial picture.
So Add up your:
- Student Loans
- Car Loans
- Credit Cards.
- Money you still owe your rich uncle, or your parents.
You did it.
Putting it all together.
So now you have an assets value, and a debts value, so now we can finally calculate net worth.
Asset Value – Debts Value = Net Worth!
So that was great an all, but is there an easier way to do it?
Funny you ask that…. yes.
Get Rich Slowly
JD Roth, who blogs over at Get Rich Slowly, has created this spreadsheet that you can use to easily run the calculations that we walked through above. This is actually the tool I use every month to update my net worth, I just have adjusted a few of the columns to reflect my current needs, and also added a section underneath to track the progress.
I have logged into Personal Capital a few times, however, at this point it isn’t my go-to place to track my finances. It definitely seems to get the attention of many of the financial bloggers, I intend to look into it further over the coming months, and I will report back to you on what i’m finding!
Mint is a financial software that will look at your transactions and automatically calculate out a sample budget for you, once you’ve connected your bank accounts, as well as information regarding loans, mortgages and retirement accounts, it will display a pretty simple net worth calculation for you.
If you’re a YNAB user like I am, you will see that there’s a report you can run that will calculate net worth, but in order for that to line up with what we’ve previously calculated, you’ll have to add in the non-account based asset values you have ( Houses, pianos, grandma’s cookie cutters).
How to improve your net worth
There are a lot of things you can do to improve your Net Worth, but ultimately it can be distilled to this: Buy more assets and reduce your debt.
If you look at JD Roth’s Spreadsheet, you have a clear breakdown of what goes into the formula as you calculate net worth.
Add more money to an asset category to make your number go up!
Pay off your credit card to make your number go up!
Decide to go around the world vacation without an income in place, and watch your number go down!
When you’re looking for ways to make your net worth improve, I think this is where the Rich Dad Poor Dad definition of asset is most important. Assets are things that put money back in your pocket. Spend your money on things that put more money in your pocket. Examples of Rich Dad type assets are: Paper Stocks, Index Funds, rental real estate, and business ownership.
I hope that this was helpful for you! It’s important to recognize that this isn’t a race, and even if you aren’t happy with your current net worth, at least now you know where you currently stand. From here you can start making the right decisions that lead to a greater net worth. Continue to calculate your net worth over time to track your progress!
It’s a process. Whether you’re currently at day zero of the process, or 15 years in, cheers to you and cheers to the process.