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To calculate your net worth, subtract your liabilities from your assets. While that's a simple equation, it's an important one to get a snapshot of your finances and understand where you are on the path to achieving your financial goals.
In fact, financial experts say your total net worth figure may be the single most critical money number you'll ever have.
What Is Net Worth?
Essentially, your net worth tells you how much money you have after you deduct what you owe from what you have. As a result, it incorporates both sides of your personal balance sheet: assets and liabilities.
"Financial success depends largely on your ability to grow your assets while decreasing your debts," says Ryan McPherson, founder of financial services firm Intelligent Worth in Atlanta. "No other number represents your progress on these two fronts like your net worth."
Your net worth can be especially helpful when things don't go as expected. "In the event that you have a major financial catastrophe such as a death, illness or job loss," says Roslyn Lash, financial educator and founder of Youth Smart Financial Education Services in Winston-Salem, North Carolina, "knowing this figure can help you determine if and how long you could sustain yourself."
Knowing your net worth can also help to reaffirm or establish your financial goals and your budget. And finally, your net worth is a good figure to use to measure your progress over time. If you're increasing your investments and savings and reducing your debt, you'll be in better shape to reach those financial goals.
How to Figure Out Your Net Worth
Calculating your net worth is simple: Subtract your liabilities from your assets. But the process can take time. Here are the steps to take to get your net worth number.
1. Pick a Date
Your net worth is a snapshot of your overall financial health at a specific time. So pick a date, preferably at the end of a month, quarter or year, so you can have a good reference point in the future.
2. Gather Your Data
The most time-consuming part of the process, this is where you'll gather all of your balances. Try to get the most accurate balance for the date you chose for your bank accounts, credit cards, loans, investments, and other assets and liabilities.
If you own a home or business, use a recent appraisal or a conservative estimate. For your car, use the Kelley Blue Book value to get a rough idea.
Write down each of your assets and liabilities or use a spreadsheet to put them all in one place. Take your time so you don't accidentally forget something. "The method doesn't matter so long as your asset and debt numbers are accurate and you track your net worth on a consistent schedule," says McPherson.
3. Add Up All of Your Assets and Liabilities
Now it's time to separate your assets from your liabilities and add them up. If you already have them written down or in a spreadsheet, the process shouldn't take long. Just remember, a liability is something you owe, while an asset is something you could potentially use to pay off your liabilities.
4. Do the Math
Again, your net worth is the difference between your assets and liabilities, so subtract the total amount you owe all of your creditors from the total amount you have in the form of cash, investments and other assets.
Why Knowing Your Net Worth Is Important
Calculating your net worth regularly is essential to your financial success. Not only can it give you an idea of how you're doing overall, but it may be able to provide some hints on what you can do to get or stay on the right track.
For example, it's possible to have a negative net worth, especially if you're young and haven't had the chance to generate enough savings. If this is the case for you, you may want to focus on paying off debt so you're not left broke if something bad happens.
If your net worth is growing, on the other hand, you can look at your individual assets and liabilities and think of ways you can speed up or sustain that growth. For example, you may consider taking some of your savings and putting it into an investment account or paying down high interest debt.
Lash advises updating your net worth calculation once a month. "That will help you see how your assets are doing and also help keep your spending in line so that you don't go backwards instead of forwards," she explains.
If the thought of having to calculate your net worth regularly doesn't sound fun, the good news is that you may not have to do it yourself. Some budgeting apps, such as Mint and You Need a Budget, allow you to connect all of your financial accounts and can show you what your net worth is at any time.
The Bottom Line
Calculating your net worth is one of the most important personal financial moves you can make. You can use it as a measuring stick for where you stand right now money-wise, and you can use it as a platform to build wealth going forward.
No matter how you use your net worth figure, calculate it as soon as possible, and keep on updating it. That way, you'll have a great assessment of your financial position—now and for the rest of your life.