See your money from a different perspective.
From my very first job as a teenager, I’ve paid attention to my money. I had a budget, I was frugal, and I saved. And as I got older, I began to invest my money too.
But despite doing all the things you’re supposed to do, I never really felt like I was getting anywhere. I knew I wasn’t in trouble — I had no high-interest debt, I had savings in the bank — but I didn’t feel like all my hard work was paying off. Shouldn’t I be rich by now, or at least well on my way?
Then five years ago, on one of those days between Christmas and New Year that all seem to blend together, I sat down and calculated my net worth. That one simple exercise, taking all of 30 minutes, has since completely changed my approach to money.
What Is It?
You’ll often hear the term “net worth” in the context of how wealthy a celebrity or businessperson is. But, as I’ve learned, it’s something that can be applied to anyone.
Your net worth is simply the difference between your assets and your liabilities. Now this may sound like I’m talking about a business, rather than a person, but the principle still applies.
Your assets are the things you have that have monetary value. This could be actual money, like savings and investments, or items that could be sold for money, like property or a car.
Your liabilities are the things that you owe money on. Usually this is debt, such as a mortgage, loans and credit cards.
The total sum of your assets, less your liabilities, is your net worth. In other words, if you sold off your assets and put everything you had towards your debt, would you have money left over, or would you still owe money?
If your assets are worth more than your liabilities, then you would have money left over and your net worth would be a positive figure. If your liabilities are higher than the assets you have, then you would still owe money and your net worth will be a negative figure.
In practice, you’re unlikely to actually sell all your worldly belongings, and if you did there’d likely be fees, taxes, and other obstacles which would get in the way. But that’s not the point of this. This is an exercise to help you see your financial situation in a different way.
Why Do This?
You may be wondering how knowing this number could help or influence your financial situation. Here are the benefits I’ve found:
The Full Picture
When we look at our finances we usually just focus on specific parts; credit card debt, retirement savings, building a deposit to buy a house etc.
But these are just components of a much bigger picture. Taking that step back to see the entire holistic view of your money can help you take stock of exactly where you stand and appreciate both the good and the bad.
If you just focus on the debt you have, it can be really discouraging. But by acknowledging other aspects of your financial situation (such as equity in a house, or your retirement savings) it can help provide some relief and motivation.
When you’re working hard towards financial goals, it can sometimes feel like you’re not making much progress. This was the exact experience I had, which led me to calculate my net worth in the first place.
The reality is that most financial goals take quite a long time to achieve — often years. And you can’t necessarily make progress every single day. You do all the right things on pay day, putting money where it needs to go, and you stick to your budget. Then you do nothing except wait.
After a year or so it can often feel like you’ve barely made any progress at all. That’s largely because it can be really hard to notice small, incremental change. But you are making progress, and it’s important for to recognize this to celebrate what you’ve achieved and to provide continued motivation.
When you calculate your net worth at regular intervals, it’s a bit like taking photos while you’re on a weight loss journey. You don’t realise how far you’ve come until you look back. It can be easy to forget what your financial situation was 6 or 12 months ago, and having it recorded gives you something solid to compare to and truly see how much progress you’ve made.
A net worth calculation helps you to see progress you’ve made in areas you aren’t even focusing on. For example, let’s say you’re focusing on reducing your credit card debt. At the same time, your retirement savings are also likely to be improving, both from additional contributions and investment growth. The equity in your home is increasing as you chip away at your mortgage principal and house prices grow. In calculating your net worth, you become aware of these improvements to your financial situation that you may otherwise miss.
30,000 ft View
I’ve always set myself financial goals, but they’ve always been small in scale. To truly change my financial situation, I needed to have a larger, long term goal to work towards, which is then made possible by a number of smaller goals.
This would not have been possible without calculating my net worth, as I wouldn’t have any idea of what my full financial situation was, or the progress I was making. This approach means I have an actual strategy for my money, rather than just ‘doing the right thing’ financially and hoping it would get me there.
Over the past few years I’ve been able to set, and achieve, quite aggressive goals for my overall net worth. And I’ve been able to do this by setting smaller goals for my investments, retirement savings, and debt repayment which all work together towards the main overarching target.
How Do I Do It?
To get started, you just need a spreadsheet (I use Google Sheets) or even just a pen and paper.
First, list out all the assets you have. Don’t worry about the values just yet, that can come later. Just think about items that would fall into this category. This could include:
- Real Estate (your home, a rental property if you have one)
- Vehicles (car, motorbike, boat, caravan)
- Retirement Accounts
- Non-Retirement Investment Accounts
- Savings Accounts
- Any other bank accounts you have (e.g. checking account)
- Other Items of Significant Value (e.g. art, antiques)
If you have multiple items in a category (e.g. savings accounts) make sure you list them out separately. You might need to come back to this list a few times as you remember items or accounts that you also have.
You then need to repeat the process for your liabilities, which could include:
- Car Loans
- Student Loans
- Medical Debt
- Credit Card Debt
- Other Loans/Debts, such as Personal Loans
Again, list out individual items separately (e.g. one line for each credit card you have).
This is a snapshot in time, so it doesn’t matter if you have some money in your bank account you know is going to be spent in the next day or two, or your about to make a payment towards your debt next week. You just need to record all the figures on this specific day.
Once you’ve listed out both your assets and liabilities, the task is then to add either the value (for assets) or the amount owed (for liabilities) for each item.
The final step is to calculate the total value of both your assets and liabilities, and then subtract the liabilities total from the assets total. This figure is your net worth at this moment in time.
Tips and Tricks
The process itself is fairly straightforward, but there are a few tips and tricks to help make this is accurate and helpful as possible:
- Only do this calculation every 6–12 months. You might be tempted to run it more regularly, but that’s not always helpful. Your financial progress isn’t a straight line — there are ups and downs, and what we want to look at is the trend over time, not the day to day shifts. If you’re aggressively clearing down debt, I’d suggest every 6 months, but otherwise every 12 months if sufficient.
- It’s best to do the calculation at the same ‘time’ within the month — either right before, or right after, pay day. This way you’re able to compare like for like and can minimize small skews that you’d otherwise have.
- Be selective in what you include as an asset. You may be tempted to include more things which have value, but which aren’t really considered assets. This would include things like furniture (except antiques), appliances and electrical items, and most jewellery. While these are technically assets, they’re quite small and difficult to determine a fair value for. Going to this level of detail isn’t necessary and would not be recommended.
- When noting the value of non-monetary assets (like property or vehicles), it’s important to remember that the value of an item is what someone would be willing to pay for it, not what you’d be willing to sell it for. Many assets have strong sentimental value and it can be hard to accept that the financial value of an item is different to the value you hold for it. But it’s important to try and remain impartial on these things so that your numbers are accurate and helpful. Where possible, I’d suggest using online services to try and determine a fair market price for these items.
- As you add your liabilities, take the opportunity to also note other details about the debt, including the current interest rate, the length of the loan, and any special deals that may be in place. This can be really helpful if you want to look at debt consolidation, or if you want to consider the avalanche or snowball technique to clearing your debt.
- You don’t need to include any bills or financial commitments in your ‘liabilities’, such as your rent, the cell phone you’re paying off, or your property taxes (if you’re not behind). While this is money you need to pay, it’s not towards a debt but rather payment for a service and is therefore considered a living expense.
Knowing your net worth is a simple and effective way of taking a snapshot of your financial situation, seeing the big picture and helping you make real improvements to your overall financial situation.
The first time you do the calculation, you might be disappointed in your net worth figure (particularly if it’s a negative). Just know that this isn’t a value of your worth, nor should you be discouraged. It’s just a reflection of where your money is right now and should give you the motivation to make consistent and sustained changes to help improve the numbers next time you run it.