Knowing your net worth can be a valuable tool in creating a personal budget and evaluating your financial progress. By calculating your net worth, you can make financially smart moves to improve your overall financial situation.
But what exactly goes into calculating your net worth?
The process of calculating your net worth as part of your personal budget involves several different steps. While it's not a difficult process, it's important that you gather certain information relating to your assets such as life insurance or investments and then liabilities before you get started.
Investopedia suggests including the following when calculating your assets:
Cash and cash equivalents
- Certificates of deposit
- Checking and savings accounts
- Money market accounts
- Physical cash
- Treasury bills
- Life insurance cash value
- Mutual funds
- Retirement plans - IRA, 401(k), 403(b), etc.
- Other investments
Real and personal property
- Collectibles - antiques, art, coins, etc.
- Household furnishings
- Primary residence
- Rental properties
- Vacation or second home
Add together cash/cash equivalents, investments, and real/personal property. The sum represents your total assets.
For liabilities, Investopedia suggests:
- Automobile loan(s)
- Home equity loan
- Margin loans
- Rental real estate mortgage
- Second mortgage
- Vacation/second home mortgage
- Credit card debt
- Medical bills
- Personal loans
- Student loans
- Taxes due
- Other debt and outstanding bills
By subtracting your liabilities from your assets, the difference will be your total net worth.
What it all means
Finding that your net worth is in the negative doesn't mean that you're financially doomed. It just means that you owe more than you own. Use your calculations to evaluate where you might be able to turn things around. For example, look at your personal budget and create a strategy for paying down more of your debt. Or, review your investment and retirement accounts to see if you need to readjust your portfolio for improved returns.
Simply put, knowing your net worth means that you'll have a snapshot that will allow you to evaluate your existing financial health, and help you proactively determine what you need to do to get back on track or to reach your financial goals.
If you're ready to see how fiscally fit your net worth is, try using one of the many online net worth calculators, or create your own net worth worksheet/spreadsheet with Microsoft Word or Microsoft Excel.
Note: Sources used in the creation of this article include Investopedia.