The topic of net worth usually revolves around those who are incredibly wealthy, but in truth, everyone can benefit from knowing their own worth. That’s because the net worth can also give you a snapshot of where you currently stand financially.
That said, it’s a different figure than your income alone. Not all high-earning individuals have a high net worth, for example.
So, what things should be considered to determine how rich or broke a person is? Let’s find out.
Know Your Assets
lapas77/Shutterstock -- Personal belongings of substantial value like jewelry should be counted towards your assets
First, list down all of your assets, including everything you own, both tangible and intangible, but not including your salary.
Remember that your income counts towards your cash flow and not your net worth.
What qualifies as an asset are your cars and other vehicles, your home, your savings accounts, your investments, and your life insurance policy. You can calculate your total assets by adding all of these things’ market value and cash value.
All business interests should also be accounted for in this first step.
List All Your Debts
Pormezz/Shutterstock -- The average American household reportedly carries $8,398 of credit card debt
Once that’s done, you can now move forward to a more difficult part: listing all of your debts and liabilities.
Acknowledging the total amount of debt you have may be stressful, but it’s a necessary part of calculating your net worth and diagnosing your financial health.
Debts are anything that you may owe a lender or creditor, including loans you took out for your house, car, or college tuition.
Personal loans, business loans, and your outstanding credit card balance should also be counted as part of your debts.
Once again, add the balance on all of these to come up with your total liabilities.
A Bit of Subtraction
Nokuro/Shutterstock -- Knowing your net worth can help you track your overall progress towards your long term financial goals
To come up with your net worth, subtract your total liabilities from your total assets. If you don’t like the number you end up with, don’t worry too much.
Remember that that net worth is only a snapshot. It may change significantly over time, especially if you’re diligent with your debt repayments.
Another thing that can increase your net worth is making automatic savings in your 401(k). On the other hand, it’s things like racking up more credit card debt that can further drag your net worth down.
To keep track of the rises and falls in your net worth over time, you can use wealth management tools like Personal Capital.