The definition of net worth is extremely straightforward if you understand the definition of its components. If you don’t, don’t worry I’ll explain it for you.
Net Work = Assets – Liabilities
I’ll admit as an accounting major this seems extremely simple to me but I understand that a lot of people rarely come across these terms and don’t know their formal definitions. Let’s get started.
Assets are things that you own that have value including things that you can sell to get money. Some examples of assets are cash, certificates of deposits, stocks, bonds, real estate, cars, jewelery and other items of value. Typically though I only include those items for calculating my net worth.
The definition of assets also includes many more items. Furniture, computers, cell phones, appliances and TVs can also be considered assets but their values often begin to diminish rapidly so I don’t include them in my calculations.
Liabilities are what you owe other people and institutions. Credit card debt, car loans, mortgages, personal loans, student loans and other forms of debt that you owe to someone else. Anything you owe to anyone should likely be considered a liability.
Add up all of your assets and add up all of your liabilities. Then subtract your liabilities from your assets. What is left over is your net worth or how much money you would have if you sold all of your assets today and paid off all of your liabilities (debt) with the proceeds.
Now realistically I know that you’ll never sell all of your assets and pay off all of your liabilities in the same day. If your net worth is negative it wouldn’t even be possible! So why do I think net worth is important?
Net worth is a benchmark that you can measure your progress. The more assets you accumulate the better off you are in general. I say in general because if you’re a hoarder chances are what you consider “assets” most people probably consider junk… just sayin’.
Some Things to Keep in Mind
Make sure to revisit the value of your assets every once in a while. Your car is going to go down in value with every month and mile that passes. To get an accurate value for my car I use the Kelly Blue Book private party value.
If you own a house it is often difficult to value it. Use your best guess but try not to over estimate. I use Zillow to come up with estimate but understand that it may not work well in your area.
Net worth can fluctuate rapidly if you hold a lot of investments and the market is making big moves every day. Try not to get too upset if your net worth goes down a lot one month or excited if it skyrockets. Over time with some effort your net worth should grow if you are spending less than you earn, are paying down debt and/or are investing.
I track my net worth monthly. I wouldn’t suggest you track it any more often than that. I use a basic spreadsheet to keep track of it and just change the numbers. Here is an example of a spreadsheet you can use.
Do you calculate your net worth? If not, why not? If so, how often? How do you track it?