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Net Worth: A Valuable Tool to Assess Your Financial Health

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Everyone should periodically assess their financials and evaluate whether they are progressing towards their established goals. Your net worth is a useful tool to gauge your financial health. Your net worth is calculated by adding up all your assets and subtracting the liabilities. Assets are items of value and liabilities are obligations to others (money you owe, such as debts). The value that remains after all the obligations are satisfied is what you are interested in determining.

Assets

When adding up your assets, it is easy to calculate those items that have an associated balance, such as your checking and savings accounts or your retirement accounts. These values can be looked up on any given day. However, for values on items such as your home, land, car, and other personal property, you will need to rely on appraisals or do some market research to determine the value. There are a wide range of assets that can be included in your net worth, but these are some of the most common:

  • Real estate: if you own real estate, whether a home or unimproved land, you likely have an idea as to the value based on the price you paid, recent appraisals, and the real estate market in your area.
  • Car: the value of your vehicle is relatively simple to calculate. Tools like Kelly Blue Book will give you a value based on the mileage, features, and condition of the vehicle.
  • Investments: whether stocks, bonds, index funds, or exchange-traded funds (ETFs), all of your currently held investments will be calculated as part of your net worth.
  • Retirement accounts: when calculating your retirement account assets be sure to include both employer-sponsored retirement plans, such as 401(k) plans or Thrift Savings Plans (TSP), as well as individual retirement accounts (IRAs).
  • Bank accounts: include all of your bank account values, as well as any cash you may have in a safety deposit box or home safe. Cash is the most liquid asset. Liquidity is a measure of how easily an asset can be converted to cash. For example, stocks are relatively liquid because they can be sold on any given weekday on the stock exchange. However, items such as real estate are less liquid due to the time associated with listing, selling, and closing on the property. While liquidity does not impact your net worth, it is an important consideration to keep in mind. You need to retain an adequate amount of liquidity to cover your regular expenses and emergencies that arise. You never want to be forced to sell an asset at an inopportune price because of insufficient liquidity.
  • Precious metals: to calculate the value of precious metals like silver and gold, look up the current spot price, which will tell you the market rate per ounce.
  • Personal property: items of value not included in the other categories, such as jewelry, firearms, artwork, etc., will be calculated under personal property. This can be one of the more difficult categories to accurately evaluate. Additionally, you should not include assets that rapidly depreciate, such as standard household furniture. If you have high-value antique furniture, then it will be added to the calculation.

Liabilities

Liabilities are relatively straightforward. If you do not own something and are making payments, then it is a liability. Any loan or debt will increase your liabilities. Again, there are numerous types of liabilities, but these are some of the most common:

  • Mortgage: while the value of your land and home is an asset, the remaining balance on the mortgage must be added to your liabilities. Otherwise, you would inaccurately assess your net worth. For example, if your home is valued at $250,000 and you have a mortgage of $175,000, then only $75,000 is contributing towards your net worth.
  • Car loan: if you are still paying off your vehicle, the balance of your car loan will be included under liabilities.
  • Credit card debt: if you currently have a balance on any credit cards, be sure to include this when calculating your liabilities.
  • Student loan debt: education loans are a common and substantial liability.
  • Unpaid bills: include any other amounts you owe that do not fall into the above categories.

Calculating Net Worth

Once you have accurately accounted for all your assets and liabilities, the next step is to calculate your net worth. Take the sum of the assets and subtract the sum of the liabilities. For example, if your home is $250,000, your car is $15,000, your investments are $25,000, your retirement accounts are $60,000, and your personal property is $5,000, your total assets would be $355,000. If you still owe $175,000 on your mortgage, have $5,000 remaining on your car loan, $2,000 in credit card debt, and $15,000 in student loan debt, then your liabilities equal $197,000. At this point, you will subtract $197,000 (total liabilities) from $355,000 (total assets), giving you a net worth of $158,000.

Conclusion

Your net worth will allow you to assess your financial health. It is calculated from the difference between your assets and liabilities. Assets add value and liabilities are obligations you must pay. To accurately calculate net worth, you must first determine what assets and liabilities you have and the associated value of each. If you are managing your money and continuing to save and invest, your net worth will grow. Periodically evaluate your net worth to determine the rate of growth and whether it is commensurate with your future goals. At the current growth rate, will your net worth be sufficient to retire in the year you planned?