How to Calculate Your Net Worth

Calculating your net worth is a very easy exercise requiring basic financial knowledge. Why should you care about your net worth? – because your bank does! When applying for a loan (especially a personal loan or line of credit) the bank will look at your net worth. Showing a negative balance sheet, i.e. you own more than you own, will more likely lead to a declined application. But don’t worry, this quick guide contains everything you’ll need to know to calculate and keep track of your net worth.

What a Net Worth Statement Looks Like

A net worth statement seems very official but really stands alone with two columns on a single piece of paper. The calculation is pretty easy as you will list on the left side all your assets and draw a second column to list all your debts. We will get to what should be included in each column in a moment.

Once you have listed all your assets and debts, you calculate the total of each column. Then, you subtract your debts from your assets. Drum roll…. This is your net worth! We hope it still shows a positive number!

How to Calculate My Assets?

An asset may have several different definitions. Some people will argue that something should be called an asset only if it generates positive cash flow. If you have read Robert Kiyosaki’s Rich Dad, Poor Dad book series, he talks about assets which generate money. In this article, we use a more conventional definition of asset where everything you own that has a value should be counted as an asset. This helps to calculate your net worth when you list your debt. Imagine that with Kiyosaki’s definition, all home owners would show a negative net worth! According to Rich Dad, Poor Dad, a house that doesn’t generate income would not be part of your assets … but your mortgage is real and will be listed in your debts!

Not everything should be included in your assets, especially if you want to get close to how your bank calculates your net worth. I suggest you start with your most valuable asset and list them one by one. Your biggest asset is probably your house if you have one. Put a fair market value. Not the municipal value, but not what your neighbor is selling at for the past 13 months without getting an offer. The goal here is not to boost numbers; it is to get an honest picture of your financial situation.

After calculating your property value, the second most important type of asset for a bank is definitely your investments and savings. Make a list of all your investment portfolios, savings accounts, CDs, bonds, mutual funds, stocks, etc. You can include all your registered portfolios (TFSAs, RRSPs, RIFs for Canadians, 401(k), Roth IRAs for Americans).  Do not include your defined pension plan in the calculation of your net worth. If you are a government employee or one of those lucky women/men with a defined pension plan (those which pays a pension known in advanced and paid by the employer), you can’t count it in your net worth. The reason is not that it’s not worth anything; it is more because it is not usable nor cashable as you want. Defined pension plans are held by the employer and they are the only ones knowing how much it’s worth. Upon retirement, you will receive your pension, but you won’t be able to cash out the full amount and live like a villain on the proceeds.

Once you have listed your properties and investments, you have pretty much calculated your total assets. You can include your car value but banks won’t give it any consideration. The reason being that vehicles lose value so fast it’s not really considered as an asset. Having said that, I’d suggest putting your car value in your net worth calculation especially to offset a car loan. Just don’t expect your 50K car to weigh a lot in a 55K net worth. Let’s just say banks are not very impressed by people who focus their net worth in vehicles…

How to Calculate My Debts?

While asset calculations in your net worth may be part of a debate, your debts calculations is a much easier task. All you have to do is to list all your personal liabilities such as mortgage, personal / car loan, credit card and line of credit balance. Don’t include authorized credit  limits but the amounts you currently owe. If you have a car lease or are renting your apartment, this should not be included in your debt calculations.

That’s it! Once you have finished listing all your debts, you can deduct them from your asset column and get your net worth. Congratulations! You have successfully calculated your net worth!

What’s the Difference between Calculating Your Net Worth and Doing Your Budget?

The net worth and budget are two different personal finance tools with very different meanings. When you calculate your budget, you basically look at your personal cash flow coming in and going out. Most budgets are done to reflect a month of income and spending. Your assets won’t show in your budget as your debts won’t be directly reflected. In fact, you will see your debt payment (car payment, lease, etc), but you won’t see how much you owe.

Calculating your net worth will tell you if you have more assets than what you owe. But it won’t help you pay off the bills at the end of the month! The budget will. The net worth is more a static picture in time of what you own and what you owe. For those who took business classes, the net worth is more like the company balance sheet while the budget is the cash flow statement.

What should NOT be Included When You Calculate Your Net Worth

I think there should not be any gray areas when calculating your debt but there might be a few additional notes to be added to your asset calculation. You may be tempted to add your jewelry or furniture in the calculation of your net worth. In fact, if you through a divorce, you will definitely take them into consideration! But when you look at your net worth from a bank’s perspective, you should ignore them.

When you think about it; is your goal is to increase the number of pearl necklaces or the size of your wardrobe or to show more money in your bank account? If you stick to your savings and your house value, you will have a better picture of your true net worth look like.

Do You Have a Net Worth Goal?

Each year, I calculate my net worth and establish a growth goal for my assets and, obviously, I focus on paying down my debts. If you want to increase your net worth, you can plan on both columns. This is what makes it so fun: you can work on growing your assets by saving more money or you can use more money from your pay check to pay off your debts; either way you win!

What’s Your First Step to Grow Your Net Worth?

Your net worth is intimately linked to your budget. If you spend more than you earn, your net worth will automatically go down. Therefore, controlling what comes in and what leaves your wallet is the most important thing.

Yeah I know, budgeting is boring and hard to keep track. But I have a solution; check out the FB Budgeting tool to learn how I got out of debt and you can do the same thing!