For many people, the idea of investing seems like an impossibility. Perhaps even facing your own finances head-on is scary and it can seem easier to bury your head in the sand. We are here to help! Before going further, you need to know how rich (or poor) you actually are. And since you're probably not Jeff Bezos nor Bill Gates, you probably can't just pick Forbes' billionaire issue to find out.
What are you worth?
Your Net Worth gives a measure of your current financial situation. Every financial decision you make should take into account how it would affect your net worth. So how do you calculate your net worth? A seemingly complicated concept that can be translated to a simple equation to reflect your financial situation.
Assets – Liabilities = Net Worth
An asset is anything you own or that has value like or your bank balance, house, car, investments or pension fund. A liability is any amount of money that you owe for example credit cards, car payments, your mortgage or student loan. While you could calculate your net worth by inputting your assets and liabilities in our net worth calculator, you can also do it with a spreadsheet. Start by making a list of all of your assets and their estimated value. Some of these will be easier to record than others. To determine the value of some of these more objective assets, you can make an estimate or seek an evaluation.
Net Worth Calculation Example
David is 35 years old. He owns a home worth $250,000 and owes $100,000 on the mortgage. His 3-year-old car is worth about $7,000 and is paid off. He has $2,000 in credit card balances, $30,000 in his 401(k), about $10,000 in savings and $15,000 remaining on his student loans. David’s assets and liabilities can be listed as follows:
Total Assets = $297,000
Credit Card: $2,000
Student Loans: 15,000
Total Liabilities = $117,000
David’s Net Worth: $297,000 – $117,000 = $180,000
What if my Net Worth is Negative?
Don’t panic straight away if your net worth is negative. Not all debt is bad debt and not all negative net worths are the same. For example, if you had $100,000 worth of credit card debt that would be bad! But if that debt was from a mortgage that would be quite different. We will cover good and bad debt in more detail later.
You can increase your net worth by paying off your debts, saving and investing money, and reducing your spending. In our next post, we are going to look at how to create and manage a budget in order to see how much extra money you could have.
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About The Author: Pip Brangam, guest writer
Pip Brangam is a writer and content marketer. After studying French Literature, she began a career as a journalist and then transitioned to marketing for startups, working for several years in San Francisco. When she is not working, she can be found exploring with her camera or reading in coffee shops.
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