Updated: Mar 5
If there’s one number to pay attention to for your financial wellbeing it’s your net worth. Tracking your net worth is one of the most important steps in taking control of your finances. It gives you a snapshot of your financial situation - where you stand today - and when tracked over time, how you are progressing. I think of tracking it just like I would with a vital sign like blood pressure.
You don’t need to be a math wizard to calculate your net worth, it’s actually pretty simple.
What goes into your net worth?
Your assets and your liabilities are the two inputs for calculating your net worth.
What are assets? Assets are everything you own. These include cash, bank accounts, investments (retirement plans, stocks, bonds, cryptocurrency), real estate, value of your business, etc. There are varying opinions of what assets to include when calculating net worth. Take Robert Kyosaki’s view of only counting assets that can make you money. So in the case of real estate, he would include an investment property that is rented out but not necessarily a primary home of residence. If you choose to include your primary residence, remember that it will be your equity that will be reflected in your net worth as the value of your home will be captured in assets and the mortgage in your liabilities. We also opt not to include personal property like a car because although you could sell it for cash, it will depreciate over time.
What are liabilities? Liabilities are everything you owe (your debts). Whether it’s credit card debt or the mortgage on your home. While this may be a painful exercise if you are in debt, it's important to develop this awareness and acknowledge the reality of where you are in order to make change. Also, not all debt is bad debt! Bad debt is generally borrowing money for purchases that depreciate over time whereas good debt is towards things that should appreciate over time.
A Simple Calculation
Net worth is calculated by taking the sum of your assets and subtracting the sum of your liabilities from that. Assets minus liabilities = net worth.
Sit down and take the time to calculate the number. There are lots of tools out there, I recommend starting out using an Excel spreadsheet like this . This forces me to stop and reflect on where I stand and where I want to go. Don’t get stuck on exact numbers, realistic estimates of the value of your inputs are fine.
Make a list of everything you own (the value all your assets) and add them up.
Make a list of everything you owe (the amount of all your debts) and add them up.
Subtract the total value of everything you owe from the total value of everything you own.
Are you surprised by the number? Did you expect it to be higher or lower? Your net worth can be positive or negative.
Obviously, you want to build a positive net worth. When you first start your journey to financial wellbeing, you may not be net worth positive today. If you’re early in your career with student debt and not a lot of savings, your net worth will probably be negative for some time. That’s ok. There may also be times in life where you need to course correct and focus on building your assets (what you own) which may put you in the red while preparing to strategically pay down your liabilities (what you owe).
Your actual net worth today is less important than the overall direction your net worth is heading. Is your net worth trending up or down? Wherever you are, there are a few things that you can do to increase your net worth, starting today.
Increasing your net worth
It’s worthwhile to take the time to review your assets and liabilities to help you understand the levers you can pull to make changes to increase your net worth.
Start with observing a general pattern of how much you make versus how much you spend. If you make more than you spend, the difference adds to your net worth. One way to be able to contribute more to your asset base is increasing your income, whether it's negotiating that salary raise, seeking a better paying job or starting a side hustle. It also is important to ensure that the difference between what you are making and spending is going into investments to make money work for you versus sitting in a checking account making nothing. And that you’re allowing the power of compounding to grow your wealth!
Alternatively, if you spend more than you make, the difference lowers your net worth.
Take a detailed look at your liabilities. Are there liabilities that you can eliminate or reduce? It’s a good exercise to review the interest rates on your debts and prioritize those that are higher to get paid off sooner. Reducing your debt is a big step in helping your net worth number increase. For example, consider refinancing high-interest loans or credit cards to speed up the debt payoff process. Refinancing to a lower rate means more of your payment goes towards the principal you owe each month, you can then reduce your debt at a faster rate.
Then take a close look at your expenses. The less you spend, the more you can put towards your assets. Review your general monthly expenses (log-in online to your credit card dashboard and review the expense categories) and see if there are places that you can cut back. Any recurring expenses you can eliminate or reduce like subscriptions? Even a few dollars here and there can add up to a lot of money throughout the course of a year and longer. Importantly, commit to saving and/or investing any of the cost savings you found to add to your net worth.
The Bottom Line
When it comes to tracking your net worth, the key is getting over the hurdle of calculating it for the first time and facing the reality of your situation. Use whatever tool works best for you and consistently track it (up to you how frequently, we suggest at least quarterly). Monitoring your net worth serves as positive reinforcement that spending less than you earn while aiming to increase your earnings over time is worth it and keeps you motivated and accountable.With a plan, over time, your net worth will go up!