Know Your Worth: How to Calculate Your Net Worth

As a kid, I was fascinated by magazine articles about celebrity net worth. It was amazing to me how much money they made. According to www.celebritynetworth.com, Eddie Murphy is worth $400 million dollars, Former President Barack Obama is worth $70 million, and Cardi B is worth $30 million. What does that mean exactly? I learned over the years that net worth is not about how much money a person earns, but how well they manage it.

What is Net Worth?

Net worth is the cash leftover if a person were to sell everything they own and pay off all of their debts. The value of the leftover cash is used to measure a person’s wealth. This is the value of the estate that would pass to your heirs. In some cases, a person’s net worth may be negative. Which simply means they owe more liabilities than assets.

Being Rich vs Being Wealthy

I mentioned earlier that net worth is often used as a measure of wealth, so it is important to differentiate between being rich vs being wealthy. I chose to define rich and wealthy in the context of developing generational wealth. Therefore, being rich is the accumulation of a large number of assets. High income, large homes, expensive cars, and valuable assets make someone RICH. However, wealth is the amount of riches that can be passed on to your heirs. When all the bills are paid and the debts are paid off, the remaining balance is wealth. I am reminded of the saying, “Rich people will tell you how much they spent, the wealthy will tell you how much they saved. The wealthy understand that saved money becomes assets!

How to Calculate Your Net Worth

To calculate your net worth, the basic equation is as follows:

ASSETS - LIABILITIES = NET WORTH

Assets are any property a person owns that has value. The value of the asset is what the person would earn from the sale of the asset, not what they paid for it. A person’s list of assets may include, but is not limited to:

• Bank Account Balances

• Investment/Retirement Accounts

• Real Estate Equity

• Artwork

• Business Equity

• Collectibles

Liabilities are any money the person owes someone else. Examples include:

• Home Mortgage

• Auto Loans

• Student Loans

• Credit Cards

To get started, gather together your bank and investment statements, insurance statements, loan statements, and the estimated value of your other assets. Be conservative on the estimated value of your assets, you want a realistic picture of financial health. To streamline your list of assets, consider grouping certain assets (examples: artwork, furniture, technology) and only including assets with a resale value in excess of $500.

Why is knowing your Net Worth important?

Net worth is often used as a measure of wealth. It is also a way of evaluating one’s financial health. There is no ideal amount of money that determines whether you are financially healthy. However, a primary measure of financial health is to have more assets than liabilities.

By knowing your net worth, you identify opportunities to take your financial portfolio in a new direction. A net worth calculation can uncover unhealthy spending habits, an overreliance on debt, or the lack of diversification in an individual’s financial plan. With proper management, you can increase your financial well-being and improve your long-term financial success.

Managing Your Net Worth

Consider using a budgeting app like Personal Capital or Mint, to track your net worth for you automatically. You can get an up-to-date analysis of your net worth and set goals for improving your situation. Also, seek out personalized advice from financial professionals on ways to increase your asset values and decrease your liabilities.

Key Takeaways

• Net Worth calculations are a means of measuring financial health.

• Being rich describes an amount of accumulation; being wealthy describes the skill of preservation.

• Assets add to the cash value. Liabilities diminish asset values.

• Calculate your Net Worth at least annually to keep track of improvements.

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