The Essential 101 Guide to Calculating Your Net Worth (and ensuring you’re on the right financial path)
You may have heard of it, but are you aware of the value of the net worth statement as a financial tool? When planning your financial future, it’s important that you know you are heading in the right direction and a simple net worth calculation can ensure you are doing so. The beauty of doing this calculation is that you are able to see where you stand financially at a specific point in time and measure it again at a future date. Let’s break it down so you can create your own (it’ll only take 15 minutes!!)
We all work hard for our money and with that money we can purchase assets. Below is a list of common assets:
- House Value
- RRSP Investments
- TFSA Investments
- Bank Account Balance
- Other Investments
For the purpose of this exercise, we like to leave out things like your vehicle and collectibles because generally these are things you use on a daily basis or don’t plan on getting rid of. To calculate your total assets, list them all out and add them up. It’s that easy. You are now halfway done calculating your net worth.
Liabilities are best defined as things we owe. Debts. To complete the second half of the equation, you need to add up all of your liabilities. In addition to this, we like to list the interest rate of these debts next to the balance. This really helps when prioritizing debt repayment. Once again, we’ve created a list below to help you out with what to include:
- Mortgage Balance
- Credit card debts
- Car Loans
- Student Loans
- Line of Credit
- Family Loan
Once listed, add them all up and you’ve got your total liabilities.
To calculate your Net Worth, all you have to do is subtract your liabilities from your assets. Looks like this:
Assets – Liabilities = Net Worth
If you have a positive number, congratulations! You own more than owe and are likely already heading in the right direction of accumulating more assets for your future. If you have a negative net worth, don’t fret. It’s common for students to have large student loans or lines of credit and new graduates to have car loans. The idea here is that you want to be increasing your Net Worth by paying off those debts. If there’s one good thing about debt it’s this: paying it off increases your Net Worth automatically (or at least when compared to buying something else of no value with that money like a movie ticket). If you have a negative net worth and it keeps getting worse, you’re going to have to make some behaviour changes in how you spend your money. Tracking your net worth on an annual basis just makes financial sense.