How to Calculate Your Net Worth — And Why It Matters

Calculating your net worth is pretty easy in theory. You just make a list of everything you owe and everything you own, and see what the difference is between them. If you own more than you owe, you have a positive net worth. If you owe more than you own, you have a negative net worth. If things somehow turn out to be exactly equal, you have a zero net worth.

In reality though calculating your net worth is a little bit subjective, because you have to decide how much the things you own are actually worth — and they’re usually not worth as much as you think they are. It doesn’t do you any good to decide that the couch you paid $1000 for is still worth $1000, for example. It’s best to use net worth as a tool, not to use it as a way to make yourself feel better.

How to calculate your net worth so that the result is useful

In order to get useful information out of figuring your net worth, you have to do three things:

  1. Include all of your debts
  2. Include all of your assets
  3. Value your assets as if you were willingly selling them to an equally willing buyer

Debts and assets

All of your debts literally includes everything you owe money on right this very minute: things like personal loans, credit cards, student loans, your cars, mortgage, HELOCs, the $5 you borrowed from a coworker yesterday, etc.

Your assets include stuff like the contents of your house, the house itself, jewelry, your car, money you’ve got sitting in the bank, investment accounts, the current balance of your 401k, cash, money that’s owed to you, etc.

Too many people decide that they “won’t count” things like their car or house, or over-inflate the value of what they own. You have to count everything as accurately as you can in order to make the results useful. I’ve never really understood the logic between not taking everything you owe and own into account; to me all that does is muddy up the picture.

Why getting a clear picture matters

Your net worth is a tool that can help you see how you’re doing financially and what areas you need improvement on. If you decide to selectively ignore certain areas for whatever reason, you’re not going to know what’s really going on there. That would be like wearing blinders and basing your financial decisions on just the things that are directly in front of you.

Calculating your net worth once can be either a good wake up call or a reassuring exercise, depending on the results that you get. But calculating it on a regular basis (whether that’s monthly, every six months, yearly, etc) can help you to see trends over time.

For example, I do my net worth each month, and base it on the value of things on the last day of the month. I’ve been doing this for years — starting with a negative net worth — and mine’s been heading generally upward ever since. Of course, there have been dips — sometimes at fairly regularly intervals.

When you have dips, it’s good to figure out why. In my case there’s been a dip every April when I pay my the balance of my taxes. The same goes for increases. Ever since I started investing, there have been dips & increases along the way that pretty much mirrored the way the stock market was acting.

Helping you pay attention

Doing your net worth helps you to pay attention. When you get used to looking at your money regularly, it can also help you to determine if you might have too much of your money in one place. Suppose I had most of my money in a mutual fund. My net worth would then be heavily dependent on whatever that particular fund did — which might seem great if it were skyrocketing, but would not be so good if it tanked. Knowing where your money is and how it’s spread out can help you take steps to minimize risk.

It can also help you to see areas where you might want to consider diversifying, or where you could make great strides by doing things like getting out of debt. And of course, it can make you feel good if it’s going up, or cause you to take appropriate action if it’s going down.

And as we all know, paying attention to your money and holding yourself accountable is key. Calculating your net worth can help you do exactly that.

YOU MIGHT ALSO LIKE

10 comments

  • I agree that it’s important and I do largely the same stuff that you do. I use multiple inputs to estimate the value of my home. A couple variations that I found work for me;
    1) Since we pay all of our credit cards off every month, I don’t count them in the debt side of the equation. I actually take it as a reduction in the asset side of the equation. This lets me track the true measure of debt which is helpful in the long run, and it ends up with the ‘same’ number anyways.
    2) Our mortgage and credit card payments process on the 1st of the month. To allow these transactions to completely show up on the credit card and banking statements, I actually do our net worth calculation on the 7th. I could probably do it on the 3rd now that transaction confirmations have been more ‘speedy’ but since I started doing this about ten years ago, it’s just a habit now!

    • I used to worry about stuff like that too, but then I realized that as long as I do my snapshot at the same time each month, it doesn’t really matter since I’m getting a similar picture. Sounds like you have a good net worth habit going :)

  • I’ve been including my car value and house in my net worth totals but I think I should probably leave the cars out. They are paid-for, but I don’t intend to sell them.

    The house has about 20-21% equity. I’m calling the value the same as what we paid for it 6 months ago, though I know it could be less. Or more? Who knows. It’s a debt though and I think I should include that.

    Mostly I think it’s helpful for me to track our cash in savings over time as well as our retirement accounts.

    • I don’t think it’s about what you intend to sell though; it’s about the value of everything you own and owe. So I’d leave them in if it were me.

  • You guys can help settle a long-simmering difference in our household. :-)

    My wife insists on leaving the value of our house out of our net worth calculation. (We own it free & clear!) Her argument is along the lines of we have to live somewhere, so we don’t have the option to liquidate this asset unless we replace it with another comparable asset or a stream of rental payments for the rest of our lives. So what’s the point of including it in net worth?

    My thought is we might one day choose to move to an area with far less pricey real estate or downsize to a condo, converting part of the value of our house to cash in the process. Or it might make sense for us to get a reverse mortgage one day. So I see our house as a potential source of cash.

    Any thoughts? Thanks.

    • I would definitely include it in your net worth, but not for the reasons you mentioned. Instead, I’d include it because calculating net worth isn’t about figuring out what you’d have to pay anyway (that’s more about cash flow). Instead, net worth is literally the difference between everything you owe and everything you own. Leaving one or the other out of the picture skews it and makes it hard to see things realistically. I break out those things out by categories so that I can see if I’m too heavily weighted in one thing or the other. Maybe you could consider doing the same.

  • I update my net worth using Net Worth IQ every month and look at it as a personal balance sheet. It is huge to track this over time to see how you are doing financially.

    I just hit a big milestone on the debt side (student loan = 0)! It was fun to see it fall so fast over the last two years.

    • Congrats on the student loan = 0, that’s awesome! And I forgot about Networth IQ. I used to use that in the past, but I guess I’m more of a spreadsheet person ;)

  • You can also calculate your net worth using Adaptu. It’s pretty snazzy for keeping track of your net worth.