One of the many, MANY things I’ve learned in my journey to get rid of my debt is that it is a very good thing to know your net worth. What is net worth? That was a question I asked myself not so long ago…

What is Net Worth?

Simply put, net worth is what you own (your assets) minus what you owe (your liabilities).

So, what you own would be things like your vehicle, house, money, personal property (art, jewelry, etc.), and so on.

What you owe would be your debt, such as credit card balance(s), student loan, car loan, mortgage, etc.

How to Calculate Your Net Worth

Now that we have answered the million dollar “What is net worth?” question, we can tackle how to calculate it. I did this not so long ago myself for the first time in my life. I always love a good challenge, and this challenges me to keep track of it in order to improve it as I continue to decrease my debt. Without further ado, as they say, let’s get to it!

In order to calculate your net worth, I’ll give you an example scenario. (I don’t know about you, but I learn best with examples.) Here we go:

List of What You Might Own (Assets):

Money in the bank – $5,000
Value of investment/retirement accounts – $20,000
Vehicle – $10,000
Value of home – $270,000
Business interests – $0
Personal property (jewelry, art, etc.) – $20,000
Cash value of any insurance policies – $0

Total = $325,000

List of What You Might Owe (Liabilities):

Mortgage – $200,000
Car loan – $6,500
Credit card balance – $15,000
Student loan – $10,000

Total = $231,500

Now that you’ve done the hard part, all you need to do now is subtract. Easy peasy, right?

Assets (own) – Liabilities (owe) = $93,500 (net worth)

Why is it Important to Know Your Net Worth?

We’ve discussed what is net worth and how to calculate it, but why is it important for you to know? Here are the two main reasons:

1. Your Financial State

In order to get yourself out of that pain-in-the-butt we call ‘debt’, as unpleasant as it is, you need to know where you stand financially. Ideally of course, you want to own more than you owe, but that’s not the case for everyone.

Your net worth allows you to have a picture of what your financial state actually is. Keeping track of this will allow you to see if you are moving in a positive or negative direction, money/debt wise.

So, simply put, if your net worth number starts decreasing, you will need to look at your spending habits and make some changes there. If it’s increasing, then you know you’re going in the right direction.

2. Where You Want to Be

Your net worth will help to show you where you are financially, but will also allow you to identify what needs to be fixed in order to achieve a better status for yourself, whether that is getting rid of debt, saving for retirement, an emergency fund, or all of the above!

The best way to get your net worth on the right track, is to increase your assets (what you own), and decrease your liabilities (what you owe).

To Conclude

Now that we’ve tackled exactly what is net worth and the way to calculate it, we can start on getting ‘er done!

Even if you are starting off with a negative net worth (more liabilities than assets), don’t let that discourage you and think that you’ll never get there. You can, and will, if you keep with it.

Please feel free to drop me a line on this. I’d love to hear from you!