One of the first interesting steps that you must learn to know what financial situation you are in is how net worth is calculated. This will help you know your “starting point” and will also help you to know if you are managing your money well in the future. If your net worth grows every month, you’re doing well. If, on the contrary, it is decreasing, you will have to make changes and adjustments.
Calculating your net worth is actually nothing difficult. You just need some free time, a pen, paper and a calculator. Of course you can replace the pen and paper with an Excel sheet.
How to Calculate Your Net Worth
First, make a list of all your assets. This includes savings for retirement, money in your current account, your savings account and fixed-term deposits, other fixed-income investments such as public debt, your equity investments, your home and your car, if do you have.
Usually it is best to make a list of ASSETS in large letters at the top. Below, to the left, you are listing each asset and next you indicate the value of that asset. One under the other.
This greatly facilitates the final calculation.
Some considerations on this point:
I usually don’t include the car. The reason is that a car loses value at any time and you would have to be updating that value constantly. Also being a downward value, it can be demotivating you to see that your net worth is falling, and give you the feeling that you are not doing things right.
Calculating the value of your home can be tricky if you don’t know the current real estate market. For this you have two solutions:
Do not include your house in your net worth. The important thing is how the time affects its current price, not its absolute value.Â If you don’t plan to sell your house in the coming months or years,Â you could simply exclude it from your calculations.
Once you have listed all the assets you have, write the total value in large letters below all the individual values. You already have the total value of all your assets.
Now, you have to make a list of all your debts. Be sure to includeÂ the balances of credit cards, personal loans, education, car, and mortgage expenses, etc.
As with the asset list, use a header that puts DEBTS at the top. In the left side you indicate the type of debt and in the right its value, one under the other to facilitate the calculations.
As with the assets also have to take into account some points:
If you have included your house in the assets you must also include the amount that you have to pay mortgage. If you have not had your home for the assets, you should not include the mortgage. Same in case of a car.
Once you have listed all your debts, list them and write the total in large letters below all the individual debts. This is the total value of all your debts.
Once you have these two numbers, calculating net worth is very simple. Take your total assets and subtractÂ your total debt. The result is your net worth.
What Does Negative Net Worth Mean?
Some people panic when they calculate their net worth and find that it is negative.
This is usually the case of a young person with one or two student loans or car notes.
Why is your net worth negative? You just have not made enough money yet to overcome the burden of debt. Don’t worry, everything will come in due time.
How Can I Make Net Worth Bigger?
You can increase your net worth by paying your debts, saving and investing money and reducing your expenses.
On the other hand, your net worth decreases when you spend money on things you don’t need. Every time you buy something “frivolous,” your net worth decreases.
It is useful to calculate net worth every month. You can calculate your monthly net worth without considering your house and car each month and then make an annual calculation where you take them into account.
This way you will have a better picture of your financial situation, without the hassle of calculating monthly the value of your house and your car. A basic goal for someone who wants to manage their finances properly is to make net worth grow every month.
Have you already started to calculate your net worth?