Calculating your net worth made simple
The net worth of a person is the total assets he/she owns, minus the total amount of debt owed (or liabilities).
The formula to calculate net worth of a person is:
Net worth calculation can be made using some free online calculators. However, there are premium online programs as well that you may use to calculate your net worth and track your overall financial performance. Many such websites will help you to record your past results too.
To figure out your net worth, first add up all your “assets”. Some of them have been given below:
1 Cash and its equivalents
- Treasury bill
- Physical cash
- Certificates of deposit
- Money market accounts
- Savings and checking account/s
2 Real and personal properties
- Vacation/second home
- Primary residence
- Household furnishings
- Rental properties
- Collectibles - antiques, coins, art, etc
- Retirement plans - 401(k), Individual Retirement Account (IRA), 403(b), etc.
- Mutual funds
- Life insurance cash value
Once you’ve added all your assets, your next move would be to sum up all your liabilities. You may carry a copy of your latest credit report to help you find out the total “liabilities (debts)” you have.
1 Unsecured liabilities
- Student loans
- Credit cards debt
- Tax debt
- Medical debt
- Personal loans
- Payday loans and other outstanding bills
2 Auto loan or lease
- Home equity loan
- Second mortgage
- Rental real estate mortgage
- Margin loans
- Vacation or second home mortgage
- Car loan/s
The result you get after subtracting your total assets from your total liabilities will reveal your net worth.
Stick to the path of success
Don’t leave any stone unturned in solving your consumer debt problems - be it utility bills, tax debt, medical bills, credit card balances or any other loans. However, observe all the necessary preventive measures while seeking professional help to avoid debt relief scams.
You may check your net worth annually. It’ll force to you to stay on track and motivate you to pay off your debts. When you’re debt free, it’ll become easier for you to build up more assets like savings, retirement funds and investments. All your sacrifices will pay off with handsome dividends during your golden days.
Net worth changes from time to time. It’s a preview of your financial goals and gives a clear understanding of your assets like home and stocks. The value of some of these assets may change, regardless of your progressive financial moves.
What does a negative net worth mean?
Negative net worth can be nauseating. It can be a result of excessive student loan indebtedness and a fast-depreciating car coupled with a poor paycheck. To overcome the negative net worth hurdle, you may use a free online debt calculator that will figure out the amount you need to pay towards your loans each month. It’ll also help you to save money at the same time.
Moreover, reckless borrowing can also be a cause for negative net worth. Say for example, you’ve binged shopped using your credit cards but haven’t planned on paying them off within their billing cycle. Your total outstanding credit card balances will add to your liabilities column. Adding fuel to the fire, there’s no valuable asset to compensate the adverse effect of your debts.
As a result, all the balances on your cards, as per their closing dates, will be reported to the credit bureaus and will start reflecting on your credit reports. It’ll in turn put your net worth on the negative.
Put the debt dragon to rest forever
If you fall short of cash, then you may work on debt repayment options to clear out your financial obligations and boost the value of your assets, in other words, your net worth. Apart from that, you need to make some serious adjustments (no matter how big or small it is) in your monthly expenditures to save more money. Invest all your extra dollars on your retirement plans or put them in a savings or checking account.
A person X aged between 35-45 years own stocks, mutual funds, and retirement accounts having median value, $61,500. At 40 years of age, if that same person increases his monthly investments by another $200 at 6% annual return, then he’ll have a net worth of around $395,624 by the time he’s 65 years old.
If the investment amount is hiked from $200 to $500, then he’s retirement fund will be almost $593,137. It’s a sizeable amount for a financially rewarding retirement.
How to make your net worth larger
Every debt payments you make or every investment you add to your portfolio will increase your net worth. You can increase your net worth by repaying your debts, actively pursuing money saving plans, cutting corner on unnecessary expenses, and implementing a smartly rebalanced investment portfolio. Similarly, your net worth will drop, if you spend your dollars on petty items like clothes, restaurants bills, interests, penalties, and so on.
The bottom line is whenever you spend on shallow items, your net worth will drop.