Your net worth is an important figure in measuring your current financial position. It is therefore important for you to know how to calculate your net worth.
Almost everyone knows how much they earn each month. Most people know how much their house is worth. Many people have a rough idea of how much debt they are in. Not many people know how much they’re net worth. This is a problem as your net worth gives a good indicator of your financial health.
What is your net worth?
Putting as simply as possible your net worth is the figure you get if you take all your assets and subtract all your liabilities. The higher the number the more you are worth. If the number is negative then you are in debt and need to take action to rectify this position.
Calculate your net worth
In order to calculate your net worth you need to list and value all your assets. These will include your house, your car, the amount of money you have in all your bank accounts or hidden under your mattress.
It will also include the value of any financial investments you have in stocks or shares. It should also include any other assets that you might have such as jewellery, antiques, paintings, coin collections, stamp collections, wine collections or any other valuable assets you have squirrelled away.
You should note all these assets down on either a sheet of paper or on an excel spreadsheet. I prefer spreadsheets as it is easier to track and update these on a regular basis. Whether you use paper or spreadsheet total up the numbers to give you your total assets.
Whilst it is fairly easy to see how much you have in the bank by looking at your current balance online and checking the value of your shares online valuing some of your other assets may be slightly harder. Don’t despair however as there are plenty of tools out there to help you.
If you are looking to value your car then sites such as Webuyanycar.com can give you a reasonable indicator as to how much it is worth. Similarly Zoopla can give you a good indication of the value of your house.
If you are unsure how much your other assets are worth looking at ebay or simply performing a Google search. If that does not provide a value then just use a best estimate as to what you think it is worth.
These are are all your debts and so should include your mortgage, credit card debt, loans and any other borrowings you may have. You should be able to obtain these values by checking your online statements or if you are old fashioned like myself your paper statements.
Again you want to note these all down on a sheet of paper or on a spreadsheet. You then need to add these up to give you your total liabilities.
By deducting your liabilities from your assets you will derive a number and this is your net worth.
How does your figure compare?
The average net worth of a person in the UK is £155,000. This gives you a benchmark against which to measure your net worth. Remember however that no-one is average. You age, location and job will all likely impact on your figure.
If you are looking for a figure to aim for then the Beckhams are worth $1 billion thanks to their football, fashion and lucrative endorsement deals.
Why your net worth matters
Knowing your net worth gives you a clear picture of how much your assets and debts are worth. This is important if you want to understand your true financial position. Knowing this allows you to track, monitor and plan.
If you have calculated your net worth this means you now know all your assets and all your liabilities.
By calculating your net worth regularly you will be able to see this figure rising or falling. Hopefully rising.
Watching the value of your assets rise always gives me a warm fuzzy feeling inside. It shows me I have managed to make some good investments in the past. It also gives me confidence to continue to invest in the future.
Watching your debts fall can give you a sense of enormous well-being. This is especially true if you have been in debt as it shows you are successfully reducing and clearing your debts.
Many people strive to be mortgage free or debt free wannabees. Seeing their debts decline can really help to motivate them and encourage them to keep chipping away at their debts.
This motivation is very important as otherwise they might lose focus.
Other people are heavily focused on increasing the value of their assets. Tracking the rise of their asset values helps to motivates these people to continue saving and investing.
Targets and goals
You can now set future targets and goals based on improving your net worth. If your net worth was negative then reducing your debts is important. If it was positive then great but it could be even better in the future if you look after your money and both reduce your debts and increase your assets.
I have calculated my net worth on a regular basis for a number of years as it allows me to understand, measure, monitor and track my financial progress. This allows me to know if I am on track to meet financial targets I have set.
Importance of net worth
Many of us focus on our income rather than our net worth. Whilst your income is important when reviewing your finances especially if you are looking to budget it only tells us part of the story. Similarly your monthly expenses tell us another part of the story.
Your net worth however shows us the full story and can be calculated fairly easily. It is somewhat surprising than only around a quarter of the people in the UK know their net worth.
Many people wrongly assume that everyone who earns higher than average wages will have a high net worth. This is not the case as the more people earn they more they tend to spend.
High earners tend to buy expensive houses, have fancy cars and go on holiday several times a year. The houses and cars may be good assets but if they are having to borrow to afford them this will adversely affect their net worth.
Everybody’s net worth will differ but being able to calculate your net worth can really help you understand your financial position and tracking it allows you to measure your progress and hopefully motivate you as well.