What does net worth mean:(how to calculate it)

In this article you will learn all about what net worth mean:(how to calculate your net worth)

What Does Net Worth Mean?

In a nutshell, your net worth is really everything you own of significance (your assets) minus what you owe in debts (your liabilities). Assets include cash and investments, your home and other real estate, cars or anything else of value you own. Liabilities are what you owe on those assets — including car loans, your mortgage, and student loan debt.

Net worth is a measure of your financial health because it basically says what you would have left over if you sold all of your assets to pay all of your debts. Every financial move you make should be aimed at increasing your net worth. This means either increasing assets, or decreasing liabilities.

Read :Learn more about net worth 

How to calculate your Net worth

There are several ways to measure your financial health. Your net worth can be an extremely useful tool in gauging your economic status and overall financial progress from year to year.

Your net worth is essentially a grand total of all your assets minus your liabilities. In other words, your net worth is the figure you get when you add up everything you own from the value of your home to the cash in your bank account and then subtract from that the value of all of your debts which may include a mortgage, car or student loans, or even credit card balances.(the balance) https://www.thebalance.com/what-is-your-net-worth-1289788

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If you’re wondering what your net worth is, tin this guide you will learn how to calculate and interpret it.

This is How to Calculate Your Net Worth.

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how to calculate your net worth

Calculating your net worth really isn’t all that hard. It just takes a bit of time, some scratch paper, and a calculator.

It is a simple process, but it requires that you gather all the information surrounding your current assets and liabilities. Most financial planners recommend that their clients keep a secure folder with information on all financial assets and liabilities to be updated at least once a year.

Gathering and organizing this information can be a bit of a chore at first, but ensures that you (and anyone else who might need it like your spouse or financial advisor) have access to the information when needed. Though such a folder can be turned into much more, calculating your net worth only requires basic financial information regarding the things you own and the debt that you owe. Here’s how to get started:

how to calculate net worth

Step 1: Make a list of all of your assets and their estimated value.

This includes retirement savings, your current checking and savings account balances, any bonds you might have, the total value of any stock holdings you might have, your home, and your automobiles. I usually don’t include any physical assets less valuable than my car, but you can do this if you wish.

While some of these assets will have very specific and obvious values (such as your bank statement), others will require you to make an estimate. Sites like Zillow  offer estimated home values, and while they shouldn’t be taken too literally, they can give you a ballpark idea of what your home is worth. Kelley Blue Book or Edmunds can help you determine the value of your car, and looking up comparable items on a resale site like eBay can help you gauge the real value of other random items.

I usually make a list that says ASSETS in big letters at the top. Underneath that, on the left, I list what the asset is and on the far right, I list the value of that asset so that the decimal points of all of the assets line up. This makes the calculation of your total value much easier.

Once you’ve listed every asset you can think of, write TOTAL in big letters over on the left, then add up the numbers. Once you have this total, you’ve got the total value of your assets.

Step 2: Make a list of all of your debts.

Now, list all of your credit card balances, personal loans, student loans, auto loans, home loans, and so forth. Much like with the assets list, I recommend a big header that says DEBTS, with each debt listed below that on the left side and the amount of the debt over on the right, with the decimals lined up for easy figuring. (Of course, you can also use a spreadsheet.)

Once you’ve listed all of your debts, write TOTAL in big letters on the left, then add up all of the debt numbers. This is the total amount of all of your debts.

Step 3: Subtract.

Finally, just subtract your total debt from your total assets. The resulting number is your net worth.

How to Calculate Net Worth: Two Examples

To illustrate the process, let’s look at two examples.

Example 1: Gina

gina

Gina is 35 years old. She owns a home worth $250,000, and still owes $150,000 on the mortgage. Her six-year-old car is now only worth about $7,000, but it’s all paid off. She has $1,000 in credit card balances, $25,000 in her 401(k), about $5,000 in her savings account, and $20,000 remaining on her student loans.

ASSETS

  • Home: $250,000
  • Car: $7,000
  • 401(k): $25,000
  • Savings: $5,000

Total assets: $287,000

DEBTS

  • Credit cards: $1,000
  • Student loans: $20,000
  • Mortgage: $150,000

Total debts: $171,000

GINA’S NET WORTH: $287,000 – $171,000 = $116,000

Example 2: Emma

Emma, meanwhile, is 25 years old and rents an apartment. She has a newer car worth $20,000, but still owes $15,000 on it. Relatively new in her job, she only has $2,000 in her 401(k), and $1,000 in savings; she’s paying down $50,000 in student loans. And she’s racked up $5,000 in credit card debt as well.

ASSETS

Total assets: $23,000

DEBTS

Total debts: $70,000

EMMA’S NET WORTH: $23,000 – $70,000 = (-$47,000)

There are several ways to measure your financial health. Your net worth can be an extremely useful tool in gauging your economic status and overall financial progress from year to year.

Some Implications of Net Worth in Practice

What does a negative net worth mean?

Some people panic when they calculate their net worth and discover that it’s negative. This is usually the result of a young earner with a substantial amount of student loan debt and also a loan on a rapidly depreciating automobile. Why is your net worth negative? You simply haven’t earned or invested enough money yet to overcome the weight of the debt. Don’t worry, it will come.

However it can also be due to overborrowing — for instance, if you’ve racked up huge credit card bills, and are not paying them down. This creates a large number in the liabilities column, with no valuable asset to offset it.

How can I make my net worth bigger? 

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Every time you make one of those debts smaller or one of those assets grows more valuable, your net worth will increase. So, you can increase your net worth by paying off your debts, saving and investing money, and reducing your spending. If you own a home, paying down your mortgage while property values rise can increase your net worth from both sides of the ledger.

On the other hand, your net worth goes down when you take on additional debt with little or nothing to show for it – particularly when you spend money on “small” things, such as clothes, food, and even interest on loans. Whenever you buy something frivolous, your net worth goes down.

How Often Should I Calculate My Net Worth?

I find it useful to calculate my net worth every month. My goal each month is to increase my net worth over the previous month — which means my expenses for the month were less than my income. I use the excess to pay down debts or increase personal savings.

Now that you know about net worth, how to calculate it, and how it changes, you could use a site like Mint.com to automatically calculate your net worth in real time and keep track of all of your finances. If you’re worried about online security, then simply stick to the longhand calculation ever month!

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