How to calculate your Net Worth
CALCULATE YOUR NET WORTH | THE FORMULA
The formula to calculate your Net Worth is straightforward: sum all your Assets (what you own), and deduct all the Liabilities (what you owe):
NET WORTH = ASSETS – LIABILITIES
However, there is a certain art in assessing Assets and Liabilities:
– Chances are, you assess goods that are only partially paid for. As such, you need to calculate how much you paid and own (Asset value) and how much you still have to pay for it, how much you owe (liability value).
– Sometimes, it’s easy to identify the value of an asset or liability: the value can be reported by your bank, financial institution, or supplier
– sometimes, you need to adjust the value of your Assets: many assets lose value over time. You need to take that into account every year. Other assets might have a high emotional value for you, but you still need to record the most realistic market value, even if it is less than you dream of!
THE EXCEL TOOL
To support such analysis and track your Net Worth’s evolution over time, check out this Excel tool you can download here.
WHY YOU SHOULD CALCULATE YOUR NET WORTH
The Net Worth provides:
- a measure of how wealthy you are. It is much more significant than your income: people can have high-income jobs and be broke at the same time.
- a system to record your Assets and Liabilities on a monthly and/or annual basis
- an insightful snapshot of how you efficiently “save/store” value
- an indication of where you stand along your financial journey
- a visualisation of your financial goal (specific value)
- a compass to help you choose and monitor your Financial Workouts (costs optimisations and the set-up of new income streams)
- Data to further calculate your Financial Freedom Number (when your annual passive income covers your annual expenditures)
There are several ways to benchmark your annual Net Worth quickly:
1) You can compare your current Net Worth with your Net Worth forecast.
2) You can compare your current Net Worth with your Financial goal and see where you stand.
3) You can use the rule of thumb proposed by Professor Stanley (author of The Millionaire Next Door):
if your Net worth > (your annual income * your age)/10, then you are on the right path.
(Example: ($64,000 *36 years)/10=$230,400; if your net worth is equal to or over $230,400, you are on the right path).
4) You can compare your actual Net Worth with the average and the median net worth of people of the same age living in the same country/region.