In our previous article we discussed net worth, its meaning, and importance. In this article, we will discuss deriving and tracking your net worth.
Calculating Net Worth
The first step in calculating your net worth is adding up your assets and liabilities. Your assets include anything of value that you own, while your liabilities include anything you owe. Once you’ve added up your assets and liabilities, just follow this simple formula:
Net Worth = Assets – Liabilities
But what Are Assets and Liabilities? Just like we explained in the last article, an asset is something you own that has financial value. Assets are either cash or can be converted to cash. Common assets you’ll count toward your net worth include checking and savings accounts, retirement accounts, investment portfolios, your home, vehicles, and anything else of financial value. A liability is a debt or outstanding financial obligation. This includes any debt such as mortgages, car loans, student loans, credit card debt, bills etc.
You might notice that some of your possessions fall under the categories of both assets and liabilities. For example, most people can’t afford to buy a car in cash, so they finance it. Your car is an asset, while the money you still owe on the payment is a liability.
Therefore, if you can evaluate the value of your assets and liabilities, you can easily calculate your net worth with the formula provided above.
Tracking Net Worth
A net worth statement is simply a list of assets owned and debt owed. For most individuals, it should easily fit on a single page. To track your net worth only two decisions need be made: What should be included in the net worth statement; and what tools, if any, should one use. Let’s look at both of these.
For purposes of monitoring your finances, it’s not necessary to include literally every asset you own. You can include all financial accounts (e.g., checking, savings, investments, retirement accounts), real estate and businesses. Many people include the value of their vehicles, in part to offset the impact of having car loans. All debts are included on the statement.
You can use a spreadsheet. A simple Google Sheets spreadsheet is a great way to track your net worth. You can find a free template here.
There are also several automated tools to track your net worth. Some of the more popular options include Mint and Personal Capital. These options not only track your net worth, but also provide excellent tools for evaluating investments and managing your budget.
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Hi there! I’m Owen, a writer, designer, and a digital marketer. I create and manage content at OG Capital. I am a highly motivated individual who is very passionate about problem-solving. Reach out to me on social media and I will be more than happy to connect with you. Cheers!