You can quickly figure out how much spending money you have by checking your bank account statement. But getting an accurate idea of your net worth is a little more difficult.
When you hear the term "net worth," you may think of wealthy people like Bill Gates or Jeff Bezos. Changes in their net worth are public and become news. But everyone has a net worth, and yours is worth knowing: It's important because it can give you insight into your financial well-being.
If you hope to accomplish your short and long-term financial goals, learning to calculate and monitor your net worth is a useful skill. And it's one that's easy to learn.
Your net worth is the value of your assets minus your liabilities, or debts. It's commonly written out as an equation like this:
Graphic by Kiersten Schmidt
In other words, your personal net worth is equal to the things you own (including investments, homes, cars, and cash savings), minus any debts you have (such as mortgages, car loans, and student loans). This is the same calculation that a business or other entity might use to figure out how much money it's worth.
What's important to keep in mind is that your net worth is different than how much money you make. "When people say, 'I have a lot of money,' it isn't quite the same as saying, 'I make a lot of money,'" says Riley Adams, a Bay Area-based CPA who runs the financial website Young and the Invested.
Adams recommends that you calculate your net worth and use it as a way to keep tabs on whether or not you're on track to hit your financial goals. That, he says, is the real value of knowing this key figure.
Video by Ian Wolsten
When it comes to tracking your net worth, how you do it is really up to you. You might sit down with a pen and paper or use a spreadsheet to update the balances of your accounts, run a net worth calculation, and note the change from your last update.
The basic strategy entails listing out all of your assets along with any outstanding debts, and crunching the numbers. Many financial bloggers calculate their net worth on a monthly basis. Even checking in once a quarter or once a year can yield valuable insights.
Another thing to keep in mind: Having a low, or even negative, net worth isn't cause for panic. It's common to have a negative net worth, especially if you're just starting out. You may not have much savings in your early 20s, for example, and have lots of student loan debt. Those are liabilities that can weigh down your numbers in the short term.
When it comes to improving your net worth, Adams recommends a three-step process:
"Set hard targets, and hold yourself to them," says Adams. "And make sure your actions align with realizing those goals."
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