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know your net worth

Why You Need to Know Your Net Worth and How to Calculate It

Understanding your net worth is necessary to gain more insight into your financial health. A financial professional or advisor will use net worth to determine what a person is doing well and the areas that need to be improved. Calculating your net worth is beneficial for many reasons.

What is Your Net Worth?

Everyone has some debts or liabilities. And everyone also owns a few assets. So your net worth comes down to assessing your assets and your debts. When you calculate your net worth, you’ll know how much you are worth in terms of dollars and cents. Although there is a process, determining your net worth comes down to subtracting everything you owe from everything you own.

know your net worthImportance of Knowing Your Net Worth

You’ll use your assets and liabilities to determine your net worth. When you add up all the things you own, like a car and a house, and then add your savings to it, it can seem like you have a lot. But to know what you are truly worth monetarily; you’ll have to factor in all your debts. When you account for your liabilities, you’ll find your net worth. Knowing your net worth is important for two primary reasons:

  • Your net worth helps you understand your current financial standing.
  • Your net worth provides you with a reference point when measuring your progress toward your financial goals.


Net Worth vs. Income

Your income and your net worth are not the same things. A person can have a high income, but that doesn’t mean their net worth is high as well. The opposite is also true. Just because someone’s income is lower doesn’t necessarily mean their net worth is low. If a person earns a high salary, but they are not careful with their spending, their low net worth will reflect it. On the other hand, someone who brings home smaller paychecks but invests and saves wisely can quickly grow their net worth. Income is comprised of the monies you earn through work, investments, etc. It’s all the money you have coming in to your budget and household. Net worth is determined by looking at assets and liabilities.


How is Net Worth Calculated?

Finding your simple net worth is accomplished by adding up all of your assets and then adding up all of your debts. Then, you subtract your total debts from your total assets. To do this, you will need to list all of your assets and liabilities.

  • Your assets include everything you own, real estate equity, investment plans, how much money you have in checking and savings accounts, and items with a definitive market value. Those items may include vehicles, art, and jewelry.
  • Your debts or liabilities include all of your unpaid debts. This includes balances remaining on vehicles, home, land, personal loans, student loans, credit card debt, back taxes, and anything else you currently owe.

Once you have added up all of your assets and liabilities, you can use this equation to calculate your simple net worth.

Assets – Debts (Liabilities) = Total Net Worth


Using a Personal Financial Statement to Calculate Net Worth

Preparing a Personal Financial Statement (PFS) is useful for calculating net worth. It can also give you a great picture of your financial standing. There are two essential documents included in your PFS. You’ll create a personal cash flow statement and a balance sheet. A personal cash flow statement will show you how much money is coming in each month. It will include all your income streams. A balance sheet will show your income as well as your expenses. The balance sheet gives you a realistic picture how of how well-balanced the inflow and outflow of your money are. It also includes the totals for your assets and liabilities, which are used to calculate your net worth.

Creating a Personal Finance Cash Flow Statement

A personal cash flow statement makes an account of all your cash inflows and outflows. It will look at how much money you have had come in and go out over a specified time. To start creating a personal cash flow statement, begin by gathering all your income and expenses.

  1. List All Your Inflow Sources

Gather all the documentation you have available. You’ll want your pay stubs, and statements for savings, checking, and investment accounts. Using this information, make a cash inflow list. This list should contain every source of money you receive. Be sure to include your salary, rental property income, and stock market earnings. Also, note that you only want to list your available income. The point is to provide yourself with a clear snapshot of where your money is coming from as well as where it is going. For example, if you make money from an investment account, but these earnings are reinvested, it should be excluded from the list. Once you’ve compiled a list of all your income sources, add them all up. This is your total income amount.

  1. List Your Cash Outflow

Next, list all your debts. This includes bills and other debts. Make sure to list everything that represents spending money or cash flow going out. List all of your necessary expenditures like car payments, mortgage payments, utilities, health care bills, and credit card payments. But also include your discretionary spendings such as groceries, dining out, entertainment, and gym membership. The objective is to determine where your money is going, even for small items. Once you have all your expenditures listed, add them up to determine your total cash outflow.

You need these two totals, your money inflow, and your cash outflow, to calculate your overall cash flow. Subtract your total cash outflow from the total cash inflow. If you get a positive number for the answer, then you earned more than you spent. However, if you get a negative number for an answer, you are spending more than you are bringing in.

Creating a Personal Finance Balance Sheet

You can use a personal balance sheet to track all of your finances. You’ll use the numbers and figures that you already calculated to create a balance sheet. Think of your balance sheet as a way to summarize your financial information. It includes:

  • Your Assets. Assets include everything you own, from accounts to cash and physical items.
  • Your Liabilities. Liabilities are all the debts you owe.
  • Your Net Worth. As calculated, this is the difference between your assets and your liabilities.

Understanding Your Net Worth

Why is your net worth important? It is often used by lenders to decide whether or not to extend you credit. But it’s also useful to you. For instance, once you know your net worth, you will understand your financial standing better. The goal, of course, is to have a positive net worth. This would mean your assets are more valuable than your debts. However, if your net worth is negative, your debts are greater than what you are worth. Having this information can be useful for helping you increase your net worth. It is not uncommon for an individual to have a negative net worth. This information should not be discouraging. Instead, it just lets you know where to start to increase your net worth.

Increasing Your Net Worth

There are many ways to increase your net worth. Taking a second or side job can help increase your income which offsets your liabilities. Creating a budget is a great way to reduce your monthly expenses and keep a better track of what monies are coming in and going out of your household each month. Work diligently to get out of debt, which reduces your liabilities and frees up more cash. Investing is also a great strategy for building wealth. The goal of knowing your net worth is to help you build financial strategies that work for you.