Your net worth is the best financial measuring stick you can use, and it is income independent! Learning how to calculate your net worth is simple and very important.
Your net worth does not care how much money you earn, or what your future potential is.
It gives you a snapshot of exactly where you are financially TODAY.
In this article I will explain what it is, how to calculate your net worth, and provide a very interesting comparison between two people that might surprise you.
So, what is net worth?
Simply, your net worth is the combination of what you own (your assets) and what you owe (your liabilities).
Your assets include the value of anything you own such as:
- Market value of your house/condo
- Savings accounts
- Investment accounts
- Valuables (coins, jewellery, collectables) [Note: I would not suggest including expensive items that will go down in value, such as a computer. This is a personal choice, but it can make tracking your net worth more complicated]
Your liabilities include the value of anything you owe (debts) such as:
- Student loans
- Credit card balances
- Car loan
How to calculate your net worth:
Add up the value of all your assets, and subtract your debts. This is your net worth today.
I will admit depending on where you are in your life, this can be a painful experience. My personal net worth is negative (likely not shocking considering I am starting a blog about debt). Do not feel ashamed if your value is low or negative! We are on this journey together, and the goal is to increase your net worth each year. Remember:
Who has a higher net worth?
Lets make a very drastic comparison between two people: A doctor and someone who is homeless. Who do you think has a better net worth?
For this example, lets say the doctor graduated two years ago and is earning 200k a year.
They bought a 500k house, but still have 450k remaining on the mortgage.
They have been slowly putting money aside, and have 10k in savings.
Medical school was not cheap, so they still have 110k left in student loans.
|House $500,000||Mortgage $450,000|
|Savings $10,000||Student loan $110,000|
|Total: $510,000||Total: $560,000|
Doctors net worth= Negative $50,000
The homeless person owns nothing of value, but also does not have any debt.
Homeless person’s net worth? $0
So who has the better net worth? That’s right- today the homeless person is winning.
You might say that the doctor has a better chance at building wealth because of their income. Society would argue that the doctor is in a better financial position, but purely from a net worth perspective they are not.
That is one of the key concepts of net worth: It does not matter what you are earning, or what your future potential is. Your net worth tells you an unbiased number of where you are NOW. It does not matter how much you have earned; it depends on how much you have kept. This is why calculating and tracking your net worth is such an important financial measure. It allows you to understand your current financial status, and serves as a reference point to track your progress.
Calculate your net worth today, and recalculate it 1-2 times a year. Be proud of your progress, not shameful about where you are starting out.
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