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Your net worth can tell you a lot about who you are when it comes to finances. It tells you how financially sound your decisions are.
If you're looking to learn more about how your financial decisions are helping (or hurting) you, you should learn how to calculate net worth. But, how do you figure out your net worth?
Keep reading to learn about your net worth and figure out how to calculate it step-by-step.
Your net worth is the difference between your assets and your liabilities. Basically, it's the subtraction of your debts from the value of those things you own.
Your net worth can give you an idea of how much money you owe. On the contrary, it can also give you an idea of how much of your debt you're able to pay off if needed.
This total can be positive or negative. Let's talk about how to interpret these values depending on where they fall.
Positive net worth is always preferred to negative net worth. However, this doesn't mean that negative net worth is necessarily bad.
In fact, net worth simply is. There is no bad or good. Net worth is a way of diagnosing your financial state rather than judging it.
Therefore, you should interpret net worth differently than you may think.
If you end with positive net worth, you should interpret this as a sign that you could (and should) pay off all of your debt now. If you can avoid having debt at all, this is the best way to clean up your financial state.
If you end with negative net worth, this is a sign that you may be undertaking more debt than you can handle. This could be because you've just taken out a loan, you're a student, or you've taken some other great monetary step.
If your net worth is neutral, this could be interpreted in several ways. It depends on what your comfort level is when it comes to spending and having debt.
Some people may be okay with zero as their net worth, while others would find this to be a sign that they are financially worth nothing. It truly depends on your comfort level and risk-taking style.
Now, let's discuss how to actually calculate your net worth so that you can gain more control over your finances.
Net worth is your assets minus your liabilities.
NET WORTH = ASSETS - LIABILITIES
Before sitting down with a calculator, you should gather all of your financial information. From your bank accounts to your loan balances, you should have all of your financial information.
If you haven't been doing so already, you should be keeping your financial information organized. It will be useful if you're tracking your net worth over time or need to access any of your financial information at the drop of a hat.
Let's go over how you should divide this information.
First, let's discuss assets. An asset is anything that you own or already have in your financial profile. Here are a few examples of assets:
Anything that you own or have a financial stake in counts as an asset. The more assets you have, the more positive your net worth will be after calculated.
When you start calculating your assets, we suggest that you start with the biggest components first. Think about the value of your home(s), car(s), and other big investments. If you're a business owner, the value of your business counts as an asset as well.
From there, we suggest that you move on to those assets that are easily liquidated. This includes bank accounts, investments, cash, and similar forms.
Next, think about your personal belongings. Yes, these count towards your net worth.
However, since we're sure that you don't want to count every hairband and price every fork, we suggest that you only count those things prices at $500 or more. These are your most valuable belongings and would make a foreseeable difference to your net worth if you were to need to liquidate these assets.
Once you've gathered all of this information, you can add all of the numbers together. Now, you have the total value of your assets.
Alone, this tells you how much money you have to your name. These values count whether they're readily available to you or not. In other words, the type of asset doesn't have to be easily liquidated.
When compared to your liabilities, your asset value can tell you so much more. Let's discuss how you should calculate liabilities.
In a few words, liabilities are debts. Your liability represents all of the money you owe to someone. Here are a few examples of liabilities:
Depending on your borrowing habits, you may have debt that you owe to a family member, friend, or business partner. These debts count as liabilities as well.
If you owe money to anyone anywhere, it's considered a liability.
As you approach totaling your liabilities, we suggest that you start with the major outlying balances. This procedure is the same as when you were calculating your assets. Instead, now, you're focusing on the money you owe rather than the money you already have.
Once you've laid out major debts like loans, you should think about any small debts that you may owe. Even if your credit card recently rolled over and you only owe a small amount (assuming you have no overturning debt), this number still counts as a liability.
If you have a loan payment that isn't due for another 30 days, this still counts as a liability. You still owe the money, even if it isn't due today.
After determining all of the money that you owe, add up the numbers. This will give you your total amount of liabilities.
For most, this number can be surprising. A single loan is bad enough, but adding them together makes it seem even worse.
Alone, your total liabilities can tell you how much money you owe in total. This could tell you that you need to cut back on using your credit card or it could let you know that it wouldn't hurt to put a purchase on there every now and then.
Before you become completely devastated over your liability calculation, you should understand that everyone approaches debt differently according to their preferred level of financial risk. You could also be a debt-prone population like younger spenders in their 20s.
When calculated with your assets, your liabilities can give you a healthier and more accurate view of your financial health.
Now that you've gone through calculating your assets as well as calculating your liabilities, it's time to put the two together and get your total net worth. To do this, subtract your liabilities from your assets.
As we shared earlier, your total net worth can be positive or negative. This does not necessarily mean that your net worth is 'good' or 'bad.'
In fact, we encourage you to use the value that you get now as a stepping stool. No matter how wonderful the number, you should see the potential above it. There is always a better financial plan.
We recommend that you recalculate your net worth at least once every year. This can give you a great baseline for understanding how your financial habits are getting better over time.
Hopefully, you'll find that your net worth is improving over time. This means that you should see your net worth increasing in value over time. This greater number indicates that you're making more money than you're spending and managing your debt well.
As you move year to year, you'll learn more and more about how you can better your spending habits to increase your net worth over time. For example, you may discover that you're putting too many purchases on your credit cards or you need to make larger payments on your loans.
Whatever the change in habit may be, the net worth calculation can help you determine it. Such a simple equation could help turn your financial situation around.
We've broken down how to calculate net worth. Now, it's time for you to run your numbers into our formula.
If you aren't savvy with your math skills, feel free to use our net worth calculator. Our calculator follows the same steps that we've outlined here. You could even use it as a way to double-check your math.
If you'd like to learn more about maintaining and improving financial wellness, check out our 8-step guide on "How to Build Wealth from Nothing".
Harvest helps increase the net worth of the 99% through artificial intelligence and financial automation. To date, Harvest has refunded over $2M in bank fees and interest charges to its members with the ultimate goal of increasing the net worth of everyday Americans by $1 trillion by 2030. Our platform starts with providing immediate relief through bank fee and interest charge refunds, orients a member's financial health with our proprietary PRO Index™, and keeps track of net worth over time aided by our suite of financial tools. Check out our 8-step guide on "How to Build Wealth from Nothing" to get started on increasing your net worth.
Disclaimer: Harvest is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.