How do you calculate your net worth? Everybody talks about personal financial basics, like saving money and having a budget. These are important, but they are not the be-all and end-all. Your net worth is an important part of managing your money and shows the true state of your finances at a particular time. Your savings account balance or bank statement won’t tell you much, if anything, about your true financial situation.
Net worth is the difference between your assets and liabilities. It is a measure used to describe an individual’s or company’s overall financial health. Your net worth represents how much money you would have if you sold everything you owned and paid off all of your debts. It is a very good indicator of the financial strength that you will have over time.
- What is your net worth?
- What are assets and liabilities?
- How do I calculate my net worth?
- What is a good net worth?
- Why you need to know how to calculate your net worth
- Know where you stand financially.
- Shows you what needs to be fixed.
- The net worth statement shows you the work you need to do.
- How to increase your net worth
What is your net worth?
Calculating your net worth is a simple way to gain insight into your financial situation. Your net worth is the difference between your assets and liabilities. It’s calculated by adding up all of your assets, including cash, investments, and property, and then subtracting all of your liabilities.
Your net worth can change depending on market conditions and other factors. For example, if the stock market rises significantly in a short period and you have money invested in it, then your net worth may increase even if you don’t make any changes to your spending habits or investments.
But if the economy is doing poorly and the value of your investments drops, then your net worth will fall even if you don’t make any changes to your spending habits or investments.
The formula for calculating your net worth is as follows:
Net worth equals assets minus liabilities.
What are assets and liabilities?
Assets are resources that have economic value and are owned by an individual. They are either tangible or intangible assets. Tangible assets include everything you can hold, while intangible assets are those you can’t hold, like copyright. Assets include all of the following:
Tangible Assets
- Cash and money market accounts
- Checking accounts.
- Savings accounts.
- Taxable bond investments
- Mutual funds.
- Stocks, including mutual fund shares and individual stocks
- Real estate holdings, including your primary residence and any other property you own that, could be sold for cash (for example, vacation homes or rental properties),
- Prepaid insurance, such as life insurance policies with cash value or annuities that provide income payments in addition to death benefits
- Retirement accounts such as pension funds
- Business ownership interests, such as partnership interests (but only if they are a significant part of your net worth).
- Equipment and vehicles
Intangible Assets
- Goodwill
- copyrights
- patents
- trademarks
- intellectual property
Liabilities are what you owe. They include the following:
- Mortgage debt
- Student loan debt
- Taxes owed
- Business debt (if you own your own business)
- Outstanding bills
- Personal loans
- Digital app loans
- Auto loans
- Credit card debt
How do I calculate my net worth?
Calculating your net worth gives you an insight into where you are financially. To calculate your net worth, you need to know the value of all of your assets and debts. Here is a simple step to follow when calculating your net worth:
Step 1
Add up all the assets.
Assets include everything you own that has a monetary value. They are either tangible or intangible. For example, Peter has the following assets:
- A home valued at Ksh8,000,000
- Ksh 1,600,000 pension
- Car worth Ksh 580,000
- Savings account balance of Ksh7,000
- A Ksh 200,000 life insurance policy
- Ksh 100,000 in Sacco savings
Add it all up, and Peter has Ksh 10,487,000 in total assets.
Step 2
Add up all your liabilities.
Liabilities are the not-fun part of calculating your net worth. Let’s say Peter has the following liabilities:
- Credit card debt totalling Ksh 120,000
- Mortgage balance of Ksh 2,000,000
- a car loan of Ksh80,000
- Ksh 200,000 loan from Sacco
Peter’s total liabilities are Ksh 2,400,000.
Step 3
Calculate your net worth.
The formula to calculate your net worth is as follows:
Total Asset- Total Liabilities
Using the above example, Peter’s net worth is as follows:
10, 487,000-2,400,000= 8,087,000
Ideally, you should have more assets than liabilities. If you have a negative net worth, it means you have more debt than assets. This means you need to focus on reducing your debt, saving, and buying assets. You will need to strictly follow your budget and look for debt reduction methods.
What is a good net worth?
A good net worth varies from one individual to another. It depends on life circumstances, lifestyle, and financial needs. However, given that it’s recommended you save 20% of your income every month, you calculate the minimum amount you should have.
For example, if you have been working for the last 10 years, then you should have assets worth 20% of your monthly income * 12 * 10 = $20,000. Let us say Peter earned a net of Ksh 100,000 per month for the last 10 years.
We can calculate the minimum net worth Peter should have as follows:
20%*100,000*12*10= Ksh 2,400,000.
Typically, Peter should have a higher net worth because the money should earn interest or the assets bought will increase in value.
Why you need to know how to calculate your net worth
Calculating your net worth gives you an idea of where you stand financially. Here is why you need to calculate your net worth:
Know where you stand financially.
Calculating your net worth allows you to review your finances. You can check whether you have enough savings and whether you are gaining value for the money you are saving.
Your net worth statement (balance sheet) is a chance to review where you stand.
Shows you what needs to be fixed.
If you have a negative net worth, you need to fix your debts. The net worth statements give you an idea of what needs to be fixed. List all your debts and see which ones you need to sort first.
The net worth statement shows you the work you need to do.
The net worth statement shows you how far you are from achieving your financial goals. It gives you an idea of how much work you need to put in to reach your goal. You will need to establish how much you need to save for retirement and the amount you need to invest to get there.
If your net worth shows a positive picture, keep doing what you are doing. In case you are falling behind, it’s time to put on your running shoes and catch up.
How to increase your net worth
There are several things you can do to boost your bottom line. Here are some of those
Design a debt payoff strategy.
Create a plan on how to pay off your debts. This will reduce your liabilities. Start paying off debts with high interest or consolidate your debts.
Create a budget and follow it religiously.
Stick to your budget plans and avoid overspending.
Grow your money.
Look out for savings accounts and money market funds with competitive rates. Explore the best way to preserve and grow your money.
Build your emergency fund.
Having an emergency fund will prevent you from borrowing to cover unexpected expenses. Build your emergency fund.
Track your progress.
Make sure you keep track of the progress you are making. Prepare your net worth statement often to see the progress you have made.
To sum things up, your net worth is simply the difference between what you own and what you owe. As we mentioned in the introduction, determining this number lets you know where you stand financially and gives you an idea of what you need to improve.
Hopefully, by now, you know how to calculate your net worth and how you can improve it. Make sure you have the right values for assets and liabilities. This will ensure you have an accurate net worth. You can seek professional advice to determine the correct asset and liability values.