What is your net worth?

Do you know your net worth? Chances are you have a vague idea of how much you have in your bank account, and you probably know whether you have debts. However, few of us actually take the time to calculate our exact net worth, comparing the exact value of our savings and assets against our debts.

Calculating and understanding your net worth can be very useful.

Not only does it give us an idea of whether we have enough money to pay off what we owe, but it also helps us to plan and budget for the future. Put simply, knowing how much extra money we have helps us to understand how much we can afford to save and invest each month, which is vital if we’re to responsibly manage our finances.

How to calculate your net worth

So how exactly can you calculate your net worth? Well, it involves adding up the value of all our cash and financial assets and then taking away the value of all our debts and financial liabilities. To take a very simple example, if you have £1,000 sitting in your bank account, and a credit card balance of £300, then your net worth is £700.

Of course, you’re likely to have more financial assets than whatever is sitting in your current account. Plus, you’re likely to have more liabilities than just credit card debt. As such, it’s good to know what kinds of things count as assets and what kinds of things count as liabilities.

Firstly, an asset is basically anything you own which has a financial value and which could be spent, exchanged or sold. Money in your wallet is an asset, as is money in your current and savings accounts. So too is the money in any savings fund or ISA (Individual Savings Account).

On top of this, your personal property counts as an asset, assuming that it can be sold. If you own a house, its value counts towards your total assets. The same goes for your car, your jewellery and any antiques. It also goes for any stocks and shares you might own.

Lastly, if anyone owes you money, that counts as an asset. So if you’ve lent a friend £100, the repayment of that £100 can be tallied up in your favour.

Conversely, a liability is basically anything you’ll be obliged to pay in the future. If you have a £1,000 loan to pay off at some point, that’s a liability. If you have a mortgage to pay, that’s also a liability. Liabilities also include outstanding or late bills you might have to pay, as well as back taxes.

Calculating and planning

Knowing this, you’ll be able to calculate your net worth, using spreadsheet software like Microsoft Excel or simple pencil and paper.

For instance, let’s say you have £4,000 in cash and savings, a car worth £2,000 and shares worth £1,000. Assuming you have a £1,200 loan to pay back, and a late rent payment of £1,000, your net worth will be £4,800.

Calculating your precise net worth like this is very helpful.

On the one hand, if your net worth is negative, it tells you that you need to start budgeting and cutting back on expenses, so as to begin saving. On the other hand, if you have a positive net worth, it tells you that you can probably afford to put away and invest a little bit more money each month.

Either way, calculating your net worth is definitely worth doing.

simon-chandler

Simon Chandler is a journalist who writes for Forbes, International Business Times and more. Follow him at twitter.com/_simonchandler_