Do You Know Your Net Worth? Learn How To Calculate It And How To Make It Grow

How much do you make a year? Most people can answer this question quickly. It might be an exact amount or a range but you know roughly how much you make.

What if I asked you, “What’s your net worth?” Most people don’t know. We think about our income a lot more than we think about our net worth. However, both matter for achieving your financial goals. Let’s discuss both terms and why they matter.

Income

Income is the money you earn over a period of time, e.g., in a month or a year. Your income can come from various sources, like a job, side hustle, or investments. There are two types of income:

- Active income: You earn this from working or as a benefit. It includes your salary, tips, wages, royalties, commissions, bonuses, or allowances.

- Passive income: This typically comes from investments, e.g., rental income, dividends, or interest income.

Income matters because you use it for your day-to-day expenses. For most people, your income determines how much you can spend. You use it to cover essential expenses like housing, food, and bills.

Net Worth

Net worth is a snapshot measure of your wealth. It is the total value of your assets minus your liabilities at a given time. Assets are things you own that have value, like your home, car, bank accounts, and investments. Liabilities are debts you owe, such as your mortgage, car loan, and credit card debt.

Your net worth shows how much money you have accumulated over time, whether as cash, investments, or other valuable possessions. It is a more comprehensive measure of how well you can meet your long-term financial goals.

If your net worth is negative, it means you owe more than you have, and if it’s positive, it means you have more than you owe. A higher net worth means you are more financially secure.

Net worth matters because it lets you handle both your current and your future needs. If you stop working and no longer earn an income, you can rely on your net worth (accumulated wealth) to cover your needs.

The difference between income and net worth

Understanding the differences between income and net worth helps you increase both to achieve your financial goals. Here are several differences between income and net worth:

- While income is a flow of money, net worth is a store of money. Income measures your cash flow, while net worth measures your wealth.

- Your income reflects your earning potential and ability to generate cash at a point in time. While your income focuses on what you earn now, your net worth focuses on what you have accumulated over time.

- Income is the money you receive regularly, such as from a job, a business, or investments. Net worth is the total value of all you own minus all you owe.

- While your income is focused on your current financial needs, net worth is focused on your long-term financial goals. You typically use your income to cover day-to-day expenses (e.g., rent, bills, etc). You use your net worth for longer-term goals. For example, your retirement savings are part of your net worth; you’re stashing away money not for now but for the future.

How to calculate your net worth

Calculating your net worth helps you take stock of your overall financial situation. You’ve heard the common saying, “It’s not just what you make; it’s what you keep.” What you make is your income, and what you keep is your net worth.

Knowing your net worth helps you make financial decisions and answer questions like “How long will it take to retire at my current saving rate,” or “Can I handle an unforeseen expense?” You can track your net worth over time to set financial goals and monitor your progress.

You can calculate your net worth in Excel (I do this) or use a free personal finance app like Mint or Empower. Here’s a spreadsheet to help you calculate your net worth. You need to add up the value of all your assets and subtract the total amount of your liabilities. For example, if you have $25,000 in assets and $10,000 in liabilities, your net worth is $15,000.

Here is a step-by-step guide for calculating your net worth (you can follow along on the spreadsheet) :

Step 1: Determine the value of your assets

First, list your significant assets. This includes cash, bank accounts, investments, retirement accounts, real estate, cars, and other valuable possessions. Focus on the assets that have significant value. For assets like investments and real estate that fluctuate in value, you can use the current value (what would you get if you sold it today) to get an accurate picture of your net worth.

For example, I sign into all my financial accounts, note my balances in an Excel spreadsheet and sum them up to get the value of my assets. It takes me less than 10 minutes to do this.

It’s okay to use a rough estimate. For your first time figuring out your net worth, getting to a rough number is more important than getting it 99.9999% correct. I focus on financial assets like bank account balances, real estate, and investments.

I don’t include personal belongings like phone, laptop, furniture, etc. I leave them out because it’s unlikely that I’ll sell them, it would take a long time to itemize everything, and it’s hard to put an accurate value on each item. You can include these if you prefer, but only include the big-ticket items and give yourself a cut-off time to move on to your liabilities.

Step 2: Sum up all your debts to get your total liabilities

Next, list all your outstanding debts, e.g., student loans, mortgages, credit card balances, personal loans, and any other debts you owe. Sum up the total amount of your debts to get your total liabilities. Calculating your total liabilities is often more straightforward than your assets. It takes me less than 5 minutes to do this.

Step 3: Calculate Your Net Worth

With your assets and liabilities listed, subtract the total liabilities from the total assets. The result is your net worth.

Is your net worth positive or negative? If it’s positive, that means you have more assets than liabilities. That’s an excellent place to be. The higher your net worth, the easier it is to achieve your financial goals.

If your net worth is negative, it’s good to know this. You’ve taken the first step in turning around your financial situation. We will discuss ways to increase your net worth next.

How to Grow Your Net Worth

There are many things you can do to increase your net worth. Here are a few tips:

- Increase your assets: When your assets grow, your net worth increases as long as your debts remain the same. You can increase your assets by saving money and investing. You can save more money by increasing your income or reducing your spending. Investing matters for growing your assets as if you only hold cash, inflation reduces the value of your money over time. Invest in things that will increase in value or generate cash.

- Reduce your liabilities: Your net worth goes up when you reduce your liabilities. You can pay off debt or negotiate lower interest rates.

The bottom line

Both income and net worth matter for financial security and freedom. A good income provides enough money for your day-to-day needs. At the same time, a positive net worth lets you build wealth to meet your long-term financial goals.

You can calculate your net worth by subtracting your total liabilities from your total assets. Calculating your net worth should be a regular occurrence rather than a one-time thing. I calculate my net worth 1-2 times a year. You can calculate yours more frequently if you prefer, e.g., quarterly. Regularly reviewing your net worth helps you monitor your progress, identify areas for improvement, and make informed decisions about your financial goals.