So, net worth. It’s fancy, isn’t it? Something only billionaires need to worry about, right? But here is the thing – it is actually pretty easy and extremely useful for people like us.
So what is net worth? Well, your net worth is everything you own less everything you owe. That’s about it. No complicated math or fancy formulas to remember or anything like that. Just pull together all your assets (that are stuff that belongs to you) and take away all your liabilities (which are those bothersome debts). This will leave you with your net worth.
So why should it matter to you? Let me just tell you a little story. A few years ago, I was feeling really good about my finances. My savings account had a nice chunk of money in it and I had recently received a pay rise at work. Life was great, as far as I was concerned.
Then my car broke down. And then my roof started leaking. Suddenly, I realized that I wasn’t as financially secure as I thought myself to be during this period of time when someone advised me on calculating my net worth; what an eye opener!
It turned out that while I had been basking in the glory of my savings, this did not stop me from accumulating more credit card debt and overestimating the value of my car by more than half its actual price. It didn’t put me under water but it sure wasn’t at where i thought it would be.
And that’s exactly why knowing your net worth matters so much! It gives you perspective.As if taking a step back from the painting – instead of zeroing on one particular aspect, one can see the whole picture.
Okay then, how do you calculate your net worth? It’s pretty simple really but let me break it down for you:
Firstly, list everything valuable that belongs to you such as bank accounts; cars (even if it’s a jalopy like mine); your house if you have one; retirement accounts; that rare comic book collection, which will be worth millions one day (well, we can dream about it).
What do you owe? Credit cards, student loans (ugh), mortgage, that money you owe your brother-in-law from that poker game last Christmas..
Sum up all the things you own. This is your total assets.
Add together all of your liabilities. These are your total liabilities.
Subtract this amount from the sum of everything else. Voila! Your net worth is what remains.
This is where it gets a little tricky. Should everything you own be included? For instance, does your old beat-up IKEA couch count? I don’t bother with stuff like furniture or clothes unless it’s something really valuable. It’s just too much hassle and honestly, who wants to think about how much their underwear is worth?
Moreover some financial gurus believe homes or cars should not be included in the calculation of net worth saying they are essential for living and driving therefore not assets for sale.No matter,I include mine though they may not.My problem!
Now, why is all this necessary? Well, keeping track of your net worth as time passes can be really revealing. That is, it’s akin to a financial report card for grownups. Are you going in the right direction? Are you cutting down on debts and accumulating assets? Or perhaps it is vice versa?
I began calculating my net worth on each New Year Day. It has turned into somewhat of a tradition – nursing my hangover with a spreadsheet and strong coffee. Romantic, I know. But you know what? It’s actually quite motivating. I love seeing that little increase every year (even if it’s just by the smallest fraction). This has been compared to acquiring new levels in video games except that instead of fake online points, these are real-life financial stability.
Some years are definitely harder than others though. Like last year when my retirement accounts tanked completely oohing like that was really annoying. Then again I realized that my home value had gone up and I’d managed to make some headway into my mortgage too. So overall it wasn’t as bad as I had initially thought then about perspective huh?
During all this, one thing that has struck me most about net worth is that there’s more than just the numerical figure itself. It is also about the story behind the numbers attached to those figures. For instance it could indicate an investment in personal development through returning back to school which may result in reduced net worth or increased borrowing due to payment of student loans being cleared after many years.
Now, I’m not saying tracking your net worth will magically solve all of your money problems for you but hey why not give it a try! You won’t find me saying anything like “you better check out your account balance tomorrow” or “it will wipe away what you owe.” However, it could possibly motivate you enough to take action towards some improvements.
For me personally, this served as a wakeup call to start saving more and spending less. It made me realize that maybe I don’t need to eat out quite so often (sorry, local pizza joint), and that putting a bit more into my 401(k) wouldn’t be the worst idea.
So, what do you need your net worth for? Well, in my non-expertly humble opinion, yes, you probably should. This might not be the most pleasurable calculation you’ll ever do (unless you’re some math nerd who enjoys this stuff of course!), however it is certainly enlightening.
And hey, who knows? The next time someone asks about your finances at a party (because that’s normal cocktail conversation), maybe you won’t answer “Uh, I think I’m doing okay?” You will have some cold hard numbers with which to back yourself up.
But please don’t get drunk and tell people exactly how much money you have. Take my word for it. Some things are better left unspoken – or in your spreadsheet.
Acknowledgment: This article was inspired by and includes information from "Why You Should Calculate Your Net Worth Every Year" published on Clark.com. For more detailed insights, you can read the full article here.
