Guest post by Alban
As you look around to determine how successful and fulfilled your life really is, you may become distracted in adding up all of the things you have – a new car in the driveway, a big TV in the home theater and a modern house on a beautiful street. However simply adding up the things you have, will not give you an accurate view of your actual net worth.
So what is the difference between what you have and what you’re worth – and why does it matter? Find out now about how important it really use to know your net worth now, and how it changes month-to-month because when you know exactly what you’re worth you will also understand the importance of the true meaning of wealth.
What Is Net Worth?
Knowing your net worth can give you a good indication of your financial situation, taking you away from the focused financial spreadsheets you manage and use to pay your monthly bills, and showing you the difference between your assets and your possessions. Your net worth is:
- Your assets minus your liabilities. Calculating your net worth gives you a clear idea of what you are really worth because it forces you to calculate the value of your assets in the current market if you were to liquidate them. Of course you can’t look at what you are worth without considering your expenses and calculating your net worth takes into account all of your debt levels, your mortgages and other loans.
- A tool to see whether you are truly wealthy. A yearly income with a lot of zeros after it and a big house do not make you wealthy if that big house and everything in it, and your lifestyle are not paid off. This is where we saw so many families struck down by the effects of the global financial crisis, because they appeared wealthy and appeared to have an opulent lifestyle when really that lifestyle was only just being funded week to week with their income and when that income is gone the lifestyle is gone too. Therefore your net worth can give you an idea of what your life is like as it is and show you exactly what you are doing and would need to do to maintain that lifestyle and all of the expensive things in it.
How to Calculate Your Net Worth
So now that you understand a bit more about what net worth is and why it is so important to know what you are really worth, you are probably curious about how to calculate your own net worth. Follow these simple steps, and find out more about the easy-to-use the Free Net Worth Calculator WordPress Plug-In to find out what you are truly worth:
- Gather together information about your assets. Your assets include the balances you have in savings and transaction accounts, the amount you have in your retirement fund, the value of your house, the value of your car or cars, and the value of anything else which can be liquidated.
- Gathered together information about your liabilities. Your liabilities are any mortgages you have on your house, your car loan, your credit cards, student loans and any loans you have taken from your retirement fund.
- Your assets minus your liabilities equal your net worth. Now subtract the total of your liabilities from the total of your assets and you will be looking at your total net worth. You may want to check your calculation is again, however it is entirely likely that you will end up with a negative net worth. This simply means you are in debt as many people are, but just because you’re not alone in having a negative net worth doesn’t mean you can’t do something about it to turn your worth into a positive.
- Monitor your net worth monthly. When you are faced with a negative net worth, or even if your net worth isn’t negative it can still be confronting to see your value in front of you in black-and-white. At the same time it can be difficult to feel as though you are making progress towards increasing your net worth when the figures of your mortgage for example seem so great. Instead monitoring your net worth regularly can show you where your assets are increasing and your liabilities are decreasing, and give you a solid platform to know that you are genuinely increasing your net worth each month.
- Track your net worth with the Free Net Worth Calculator Plug-In. If you are a blogger on WordPress, The Net Worth Calculator PlugIn can be downloaded and installed in just minutes, and gives you a clear and easy way to monitor your progress towards increasing your net worth.You simply need to enter your assets and liabilities, and update them regularly and the Net Worth Calculator Plug-In will track your progress in graphs and tables which you can post to your blog to monitor your journey. You can choose to hide the values or calculations of certain assets or liabilities if you choose but you will retain complete control over your financial import in the back-end program.
- Knowing your net worth in the long term. Monitoring your progress month-to-month using the Net Worth Plug-In can make it easy to see, track and control your assets and liabilities. However tracking your net worth is not something which can be done for six months and then put on the shelf with all your other gadgets. Knowing your net worth for the long-term can help you avoid nasty surprises down the track, if your circumstances change. For example house prices in your area may drop significantly with the new industrial development nearby, or the value of your managed fund may decrease as the property market slows overall. If you were to lose your job or be unable to work, and you thought you knew what your net worth was and that it could carry you through some tough times, you don’t want to find that in lapsing your net worth tracking circumstances have changed.
It can be easy to get swept up in filling your life with things which make you feel wealthy and successful. However it is important to balance the feeling of wealth with the true meaning of wealth so take the time to take a look at your true assets and your liabilities to confirm your net worth.
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Alban is a personal finance writer. He writes on various finance topics and helps people to compare credit cards and savings accounts online.
PS: If you’re just getting started in your journey, here are a few good resources to help track your money. Doesn’t matter which route you go, just that it ends up sticking!
- The "Budget/Net Worth" spreadsheet - the colorful Excel template I personally use.
- The "Money Snapshot" spreadsheet - a simple Excel template I created for my former $$$ clients
If you're not a spreadsheet guy like me and prefer something more automated (which is fine, whatever gets you to take action!), you can try your hand with a free Empower account instead (formerly Personal Capital)
Empower is a cool tool that connects with your bank & investment accounts to give you an automated way to track your net worth. You'll get a crystal clear picture of how your spending and investments affect your financial goals (early retirement?), and it's super easy to use.
It only takes a couple minutes to set up and you can grab your free account here. They also do a lot of other cool stuff as well which my early retired friend Justin covers in our full review of Empower - check it out here: Why I Use Empower Almost Every Single Day.
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I just recently started calculating my net worth. With the spill in the stock market of late, I am afraid to calculate it again in a couple weeks. But I accept it will fluctuate as does the market and our bills. I have found that it actually has given us a little peace of mind because at least we know where we stand. If we see the market volatility is getting to be too much to bear, then we can move our assets into more conservative investments.
Another great way to use your net worth calculations is as a motivator, especially if you’re currently stuck in a lot of debt. Doing it for the first time can be really depressing, but stick to it! What’s important is the trend. As long as your net worth has an upward trend then you should continue to track your progress and use it as a motivational tool.
Great advice about tracking your net worth. Like you said, it’s important to do this to keep an accurate picture of where you stand. For example, If you live in a $200K house it’s important your mental perspective always sees that number next to the outstanding mortgage balance.
When calculating your net worth I also think it’s important to exclude consumer purchases like home theater systems. The point being that when you spend $2K on a sweet TV you realize that expense and don’t pretend it’s just liquidity converted to an “asset.”
If you track it and track it often hopefully you can watch the numbers slowly rise. It makes all the small sacrifices seem worth it and you feel like you have something ‘tangible’ to work for (even if it is a little piece of paper or a computer screen, one day you can convert it all into a real chunk of cash)…
It really is a GREAT snapshot of your finances. I can’t tell you how comfortable it is just *knowing* where you are financially every month – even if that’s up $100k or down $100k. Once you KNOW exactly what’s up and can track it consistently, you’ll subconsciously start working on improving it every month. Kinda like a challenge to yourself ;) So keep on tracking it guys!!! And if you aren’t yet, time to get on it.
I always found net work to be a rather fickle way to determine someone’s personal financial value. It’s a yardstick in a way, but when you take into account expenses going out, things like that, using it as a way to measure one’s financial strength is a little bit finicky.
I always found the monthly or annual income statement to be a much healthier yardstick for that. :P
I’ve just recently started tracking my net worth. I think it’s a great way to accurately determine your financial aptitude. Love it when your net worth stays the same when paying down principal on a mortgage. I would love to recover the interest too, but I can’t have everything I guess, haha.
Also, I don’t mean to get too dark here, but when you die, all your assets stand good to cover all your liabilities. And then your heirs get the rest – if it’s counted that way after death, why wouldn’t you count it like that now?
Great informative post. Thanks.
True about death stuff!