Your net worth is the total of your current assets minus current liabilities. If you have a positive net worth, it indicates that your assets are worth more than your liabilities. When your liabilities surpass the value of your assets, you have a negative net worth.
How to Calculate your Net Worth?
Before calculating your net worth, you must understand the difference between assets and liabilities.
Assets
Anything with monetary value qualifies as an asset. Checking and savings accounts, cash, bonds, equities, mutual funds, and retirement accounts can all fall under the category of assets. Personal belongings like vehicles, jewelry, or real estate are also considered assets.
If you don’t know the value of your asset, you can get them appraised. But you might pay for that. So, you can evaluate your net worth yourself to get a rough idea. To help you be more accurate, do some research. For instance, to find out how much your car is worth, you can use Kelley Blue Book.
Liabilities
A liability is a debt, such as a loan or a mortgage. In simple words, it’s everything you owe.
Liabilities may consist of the following:
- Credit card debt
- Student loans
- Car loans
- Personal loans
- Home Mortgage
You can add up all of your debts to determine the total sum of your liabilities.
Net Worth Calculation
Simple net worth calculations involve adding up all of your assets and deducting your liabilities, often known as debts.
As previously mentioned, all of your possessions, including the amount of money in your checking and savings accounts, the equity in your home, your savings and investment accounts, and other objects having an apparent market worth, are considered your assets (car, jewelry, clothes, art, etc.).
Liabilities include all unpaid obligations, such as the outstanding balance on personal, business, or credit card debt, student loans, back taxes, and other bills.
You can use the following equation to determine your net worth:
Assets – Liabilities (Debts) = Total Net Worth
Reasons for Calculating Net Worth
It is a good idea to calculate your net worth for a number of reasons. When assessing your request for a home, business, or auto loan, a financial institution could inquire about your net worth. The bank or credit union can also determine whether you can repay the loan by calculating your net worth.
You might need to determine your net worth when signing a prenuptial agreement, consulting with an accountant or financial advisor, or filing your taxes. Net worth statements are frequently produced by many businesses and sent to investors and regulators.
Your net worth may also indicate the status of your finances. Your net worth tends to increase as you reduce debt, increase your savings, and obtain raises in pay. As you begin to save for retirement, you might also wish to keep track of your net worth.
Tips for Building Your Net Worth
If you want to increase your net worth, here are a few steps you can take.
- Start with a Budget: Try making a budget for your expenses.
- Pay Down Your Liabilities: Limit your expenses and pay your debts first.
- Start Investing Early: Invest your money in some of the profitable businesses.
- Save Money: Always try to save money instead of wasting it on luxuries.