Ryan O’Leary is a writer and former financial services professional. He writes about personal finance for Wealthsimple and his work has been featured by the New York Stock Exchange. Ryan holds a Bachelor's degree in International Business from University College Cork in Ireland.
Net worth is the sum total of what you own minus what you owe. This extends well beyond how much money you have in the bank. In financial terms, net worth is the sum of your assets and your liabilities.
Your assets are everything you own that has tangible value. Cash counts toward this, but so do all of your major possessions as well. If you own a car or property, these are assets. Any stocks and bonds are too. So are a comic book collection, a piece of art, or a signed basketball jersey. Under particularly thorough accounting methods, you might even include your living room furniture.
Essentially, anything you own that could sell for a non-negligible amount of money counts as an asset. Generally, accountants tend not to consider various pieces of personal property under assets, so you likely wouldn’t include your TV or novels on the bookshelf. All of these are technically assets, but would likely have minimal value if you tried to convert them into cash.
Your liabilities are any defined, enforceable debts or financial obligations. This typically includes categories such as credit cards, student loans, mortgages, car loans, and rent payments.
The standard model for liabilities only looks at actual debt. This is money that you have taken out and currently owe or money that you currently owe for rendered services. For example, if you pay your TV bill at the end of each month, that month’s bill is considered part of your liabilities because you have received the service (a month of TV) but have not yet paid for it.
The next month’s TV bill would not be part of your liabilities, as you have not yet incurred that debt.
As a result, a typical liability calculation does not include the rent that you pay on an apartment lease. Although this does create a contractual obligation, under the standard terms of a residential lease you owe the money in advance of receiving services (that is, you pay the rent for a given month at the beginning of that month). As a result, you have an obligation but not technically a debt.
You might be wondering which assets and which liabilities to include in a net worth calculation. The answer is simple: everything.
Net worth is a concept that can be applied to both individuals and businesses, as a measure of how much they are really worth. In the corporate world, net worth is also called book value or shareholders’ equity.
How to calculate net worth
The word “net,” in financial language, means “after subtracting expenses and debts.” A consistent increase in net worth means assets are growing faster than debts, and suggests good financial health. Conversely, when liabilities grow faster than assets, or when the value of assets drop, net worth decreases, suggesting financial problems.
Calculating your net worth can be a simple process, but it requires that you gather all the information surrounding your current assets and liabilities. Most financial planners recommend that clients keep a secure folder with information on all financial assets and liabilities to be updated at least once a year.
Gathering and organizing this information can be a bit of a chore, but ensures that you (and anyone else who might need it, like your partner or financial adviser) have access to the information when needed. When getting started, calculating your net worth only requires basic financial information regarding the things you own and the debt you owe.
1. Calculate your assets
Start by listing your largest assets. For most people, this could include the value of their home, any real estate properties, or vehicles like cars or boats. In the case of a business owner, this list would also include the value of their business, which has its own more complicated calculation. Be conservative but accurate with estimates of current market values, especially with home and vehicle values. Inflating the value of large assets may look good on paper, but it may not paint an accurate picture of your net worth.
Next, you’ll want to gather your latest statements for your more liquid assets. These assets include checking and savings accounts, cash, vinyl records or other investments such as brokerage accounts or retirement accounts.
Finally, consider listing other personal items that may be of value. This will include the cash value of any insurance policies on which you can collect, any debts that someone else owes you or personal property with significant value (such as valuable jewelry, musical instruments or a rare wine collection). You don’t need to itemize everything, but you can try to list items that are worth $500 or more.
Now, take all of the assets you have listed and add them up. This number represents your total assets.
2. Calculate your liabilities
Again, start with the major outstanding liabilities such as the balance on your mortgage or car loans. List these loans and their most current balances.
Next, list all of your personal liabilities such as any balance on your credit cards, student loans, or any other debt you may owe.
Now, add up the balances on all of the liabilities you have listed. This number represents your total liabilities.
What if something is an asset AND a liability?
When you’re calculating your net worth, you may find that something is an asset and a liability at the same time. Let’s say you own a house that is valued at $350,000 and you have a mortgage on that house that is $250,000. In this example, you should add the full $350,000 to your assets calculation and the $250,000 to your liabilities calculation (each should be its own line item).
The same approach works for a car. If you own a car valued at $20,000 and you have a car loan for $10,000, then add the value of the car to your assets and the car loan to your liabilities. This way you’ll have the details of everything that you own and owe.
3. Calculate your net worth
To calculate your net worth, simply subtract the total liabilities from the total assets. For this exercise, it doesn’t matter how big or how small the number. It doesn’t necessarily matter if the number is negative. Your net worth is just a starting point to have something to compare against in the future.
If you repeat this process at least once a year and compare it with the previous year’s number, you can determine if you are making progress or getting further behind on your goals.
How to improve your net worth
Are you pleasantly surprised by your net worth or did you expect it to be higher? If so, don’t worry. There are some things you can do to help grow your net worth.
Review your assets
You may not know exactly how much all your assets are worth, or how that value is going to change, but you can get an estimated figure. Your main assets will likely include your primary residence, any rental properties, investments, and collectibles.
Remember to add the taxes on any investments you have to your liabilities.
Review your liabilities
Take a detailed look at your liabilities. This should be an easy number to figure out as it’s simply how much debt you owe each month and in what form, such as your mortgage, credit card debt, and loan payment. Are there liabilities that you can eliminate or even reduce?
Reducing your debt is a big step in helping your net worth improve.
Consider refinancing high interest loans or credit cards to speed up the debt payoff process. Refinancing to a lower rate means more of your payment goes towards the amount you owe each month, allowing you to chip away at your liabilities faster.
Alternatively, consider changing things up with your payment plan. Rather than making one payment towards your debt each month, consider making weekly or biweekly payments instead. This can help to reduce the total faster, in turn reducing the total amount of interest you pay.
Cut your expenses
The less money you spend, the more you can accumulate in net worth. If you haven’t done a budget review lately, look at your current expenses and see if there are places that you can cut back. That includes skipping your morning coffee runs or canceling subscriptions for newspapers you don’t read.
Remember, a few savings here and there can add up to a lot of money throughout the course of a year.
Pay off your debt
Money you owe is money that could be used to grow your net worth. Pay off all your debt as soon as you’re able, but be aware of the penalties that can be applied for early payment (like with mortgages). Identify high-interest debt and target that first, paying off lesser debt along the way.
Review your annual costs
What annual costs are bringing your net worth number down—and which ones don’t you need? Take a look at things like your insurance and healthcare costs each year. Compare interest rates and see if any of these annual costs can be trimmed or eliminated entirely. Then, commit to saving or investing the difference to add to your net worth throughout the year.
Use existing savings to your advantage
Perhaps you already have a savings account. If you do, are you using it to its full potential?
Your checking account should be lean enough for your regular spending and everything else should be in interest-bearing savings accounts. Even better, invest what you can. Index funds offer an accessible starting point.
If your savings are in a piggy bank in your bedroom, you’re not making your money work for you. If you do go down the investing route, resist the urge to immediately spend any returns you may get; invest it to ensure that you will continue to reap the benefits well into the future.
Your net worth is an easy way to get a sense of your overall financial health. By sitting down and adding up all that you own and subtracting everything you owe, you can get a pretty good picture of your financial footing.
That’s not to say that your net worth is the ultimate arbiter of your financial success or failure. It’s kind of like tracking your weight as part of an overall fitness plan: It’s a helpful indicator, but it doesn’t give you the whole picture. Your weight, after all, doesn’t take into account your muscle mass, or how much you can run. It’s just a number.
You might have a negative net worth because you got an expensive MBA that will significantly increase your income over the course of your life. That doesn’t mean your financial health is bad. This just means your investment in yourself hasn’t yet paid off in a way that’s easily quantifiable.
Tracking your net worth over time is an easy way to not only show how far you’ve come, but also show how much room there is to grow into the future.
It’s never too early or late to improve your net worth. Enjoy a high rate of return with Wealthsimple Save. There’s no account minimum so you can start saving as much or as little as you like. You can sign up in a matter of minutes, so what are you waiting for—get started with Wealthsimple Save.