You’ve set up an emergency fund, eliminated unnecessary expenses, and paid down your credit card debt. But, how do you know that you’re actually making headway in improving your finances? How do you know if all your hard work and effort is actually taking you to a better place financially?
Unless you have a way to track your progress, there’s really no way to know where you stand. You need a measuring stick, and that measuring stick is your net worth.
Your net worth is the value of all of your assets minus the value of all your debt.
YOUR NET WORTH (wealth) = YOUR ASSETS – YOUR DEBTS
Your net worth is the report card by which you can evaluate your financial progress. It also represents your true wealth. This is an extremely important point to remember. The mistake we often make is to measure wealth by how much income we bring in. Yet, someone with a high income can have a low net worth (wealth) if they’ve amassed a lot of debt.
Calculating Your Net Worth
To calculate your net worth, you’ll need to calculate the value of all your major assets. You’ll need to determine the value of your:
Car and other recreational vehicles
Home and other real estate
Savings and checking accounts
IRAs, 401Ks, mutual funds, and other investment accounts
Other major investments (art, coin collections, antiques, etc.)
Now, you want to calculate the value of all your debts (liabilities). Determine how much you owe for your:
Credit card debt
Once you subtract your debts from your assets, you’ll have calculated your net worth. This will be the measuring stick you use to evaluate your financial progress.
Many people have a negative net worth, which means they owe more money than the value of stuff they own. That’s OK. The key point is to make the right decisions that ensure your net worth increases over time.
Review your net worth periodically so that you can track your progress and make adjustments in your financial life as needed.
Remember, your net worth is one of the most valuable tools you have in your financial arsenal. It’s the guidepost that helps you determine if you’re actually building wealth or falling further into debt.