Have you ever wondered what you are worth? While there’s no good way to add up all of one’s good deeds, contributions to society, or even the amount of sunny smiles, we can at least calculate how much you’re worth in terms of your finances. When looked from a financial perspective, this calculation is known as your net worth.
How do you weigh your worth?
What is "Net Worth"?
Officially, your net worth is the total of your assets minus your total liabilities. In other words, it’s the difference between everything you own that has value and any debt you owe.
Step 1: Determine Your Assets
To begin with, let’s start by figuring out the total value of all of your assets. Like your small business, this includes things like bank accounts, car(s), real estate, savings, brokerage accounts. However, it also includes items such as: furniture, home gym equipment, entertainment systems, jewelry, and even your pets! If someone would pay money for it, even if it’s just $5, it counts. Let’s look at this example:
- Checking Account - $18,269.76
- Emergency Fund - $7,454.58
- General Savings Account - $1,725.86
- Wealth Builder Account - $2,035.00
- 401K - $1,709.00
- Roth IRA - $13,631.18
- Health Savings Account (HSA) - $484.60
- House - $167,500.00
- Car (Kelly Blue Book Value) - $8,747.00
- Guitars and Amps - ~$2,000
- Electronics - ~$2,000
- Furniture and Appliances - ~$3,000
- Sports Equipment - ~$500
- Other - $1,500
- Total: $230,556.98
In this example, this person has the usual accounts and expensive purchases (checking, saving, IRA, house, car, etc), but also has a decent collection of their assets stored up in their sports and music hobbies. Instead of sports or guitars, other people might have video games, horses, or art. It’s easy to determine the values of your bank accounts as they are recorded to the penny. However, it’s important not to ignore the physical things you own as well. For items like a car or a house, you can get them appraised. For other things, such as a five year old couch or a collection of blankets, do your best to approximate their worth as if you were to sell them.
Step 2: Determine Your Liabilities
The next step is to figure out how much you owe. This includes things like student loans, credit card debt, mortgages, car loans, etc. Let’s look at another example:
- Mortgage - $114,000
- Student Loans - $40,000
- Car - $7,000
- Total: $191,000
In this example, this person has the typical debts of car, student loans, and mortgage. Other common debts might include hospital bills or personal loans.
Step 3: Find the Difference
Simply subtract the total liabilities ($191,000) from your total assets ($230,556.98) and you will see how much money you would have if you liquidated everything you own. So, in this example, the net-worth is $39,556.98 or around $40,000.
What's the Point?
To begin with, it’s kind of fun to find your actual worth. In the unlikely event of a hostage situation, you can tell your captors exactly how much ransom they can expect to get from you!
It could happen. You never know.
On a more practical level, finding out your personal owner’s equity can help you track trends on your overall wealth. If you spend a little time calculating your net-worth each month you can see whether your wealth is increasing, decreasing, or remaining constant. If you find that your overall wealth is on decline then you know some hard changes might be required to improve your financial well-being.
Additionally, this information allows you to acquire better interest rates on future loans. If you can provide proof that you are financially stable and that you are making more than you are losing, or are in the green, then you are more likely to get better loan value.
In Conclusion
Finding out your net worth can be helpful for a variety of reasons. That being said, it can also lead to some strong emotions, both good and bad. Don’t worry if you’re disappointed if your net worth isn’t what you were expecting. This is only a snapshot of your financial performance and will change over time. There are many reasons why someone might have a low net worth ranging from unfortunate circumstances to financial inexperience or some combination of the two. Remember, your personal worth is more than just a dollar sign and things can always improve.