Wanna know how you’re doing in life financially? You might look at how much money is in your savings account, how much you have invested, or how much debt you have left to pay off. You could also look at your income or your credit score and compare those numbers against those of your peers. But in reality, any one of those things could be great while your overall financial position is terrible, or vice-versa.
That’s why you need to zoom out and calculate your net worth, the single number that summarizes your whole financial situation. Without it, you may have an unrealistic perception about the progress you’ve made.
How to Calculate Your Net Worth
Calculating your net worth is easy, and it’ll probably take you somewhere between 5 and 45 minutes, depending on how complicated your finances are.
The first thing you need is to add up the total value of all your financial assets. It’s really important to be thorough. Here’s a checklist to make sure you get everything:
- Cash
- Checking, savings, and money market accounts
- Stocks, bonds, CDs, and other securities (including vested balances in retirement accounts)
- Real estate (just the gross value; we’ll handle the mortgage balances later)
- Tangible financial assets like gold and silver bullion
- Cryptocurrencies
- Cash surrender value of any whole life insurance policies
- Money owed to you by anyone (that you truly expect to be paid back)
- Anything you purchased with the explicit purpose of investment
When adding up all your assets, I recommend being realistic about their current values. For example, to calculate the value of our house, we look up the Zillow Zestimate and subtract 10% to be conservative (accounting for negotiations and closing costs). I don’t recommend counting anything that you don’t view as a financial investment — for example, the value of your car, your refrigerator, or your video game collection.
Next, you need to add up all the money you owe (your total debt). Not just the monthly payments, but the total balances remaining to pay them off. This includes things like:
- Credit cards (present balances, not statement balances)
- Car loans
- Mortgages
- Personal loans
- Student loans
- Medical debt
- Money owed on appliances, furniture, etc.
- Payday loans
- Money you’ve borrowed from people
Once you have all that, the formula is very simple:
Net worth = (Total assets) − (Total debt)
If your net worth comes out negative, it means that you owe more money than you have in total assets, which means you might have a debt emergency. There’s no reason to feel shame about this, especially early in life, but it is something you should take seriously. Consider focusing your efforts on paying off debt as fast as possible, starting with the highest interest rate loans first.
If your net worth comes out positive, that means your assets exceed your debts. The higher the number, the better. Comparing yourself against others is a pretty frivolous thing to do, but if you’re curious, the data is available.
Why You Need to Be Obsessed with Your Net Worth
Other financial numbers represent your ability to accomplish very specific goals, with a very narrow view. The amount of money in your savings account tells you how much cash you have on hand for an immediate purchase, without taking on additional debt or selling anything. Your credit score gives you an idea of how likely you are to be approved for loans. Net worth is very different than these things. It gives you a “big picture” view of your finances.
Ultimately, net worth measures your freedom in life at any given moment. If your net worth is $100,000, that means that if you sold your house, liquidated all your investments, and paid off all your debts with the proceeds, you’d still be left with $100k cash to create the life you want. You can think of it like your “start over” number if you’re in the process of re-imagining your financial life.
Knowing your net worth can also be a source of strength and can even encourage a more adventurous path. Being aware of the exact size of our money buffer is really what gave us the courage to take six months off in Hawaii and later to visit all the National Parks.
For us though, the most important implication of our net worth is how close we are to financial independence — the point at which we no longer need to go to work at all to support ourselves. That’s the final frontier.
How to Track Your Net Worth Over Time
The change in your net worth over time represents how quickly you’re getting richer. It encompasses your income, your expenses, and the performance of your investments, all in one place. We calculate ours once a month, on the exact same day every month, to measure the progress we’ve made. I highly recommend this to everyone.
Tracking your net worth cuts through complicated financial noise and gives you a clean, distilled picture of what’s going on with your finances. In the last month, let’s say two paychecks rolled in, you paid some bills, your debts accumulated some interest, your investments paid you some dividends, and some payroll deductions went into your work retirement plan. Some balances got bigger while others got smaller, so you might be wondering: Did you get ahead this month or not?
There’s an easy answer: If your net worth increased by $3,000 compared to last month, then that means you advanced your overall financial position by $3,000 in the last month, regardless of what your checking account balance or any other individual account says.
The other great thing about tracking your net worth is that it stops the negative feedback you normally get from making certain good financial choices. For example, let’s say you take money out of your bank account to pay off a $5,000 credit card balance all at once. If you’re constantly looking at how much cash you have on hand to measure your wealth, it’ll feel like you just “lost” $5,000. Bummer.
But in terms of net worth, this action didn’t cost you anything at all! You just intelligently used some cash to eliminate an equivalent amount of debt, and your overall net worth didn’t suffer at all as a result of the transfer. In the long run, your net worth will actually start to grow a little faster because of this transfer too, since you “stopped the bleeding” caused by interest on that debt. Nice job!
To track our net worth monthly, we use Google Sheets. You can check out a template of our net worth tracking sheet for free and save a copy to use for yourself! If you find it useful, consider returning the favor by supporting our site.
To use the sheet, first make a copy in your own Google Drive. You won’t be able to edit ours directly. Next, clear out columns A and B. That’s all just example data. Now choose a monthly goal for your net worth increase, and input it in cell H3 (you can always change it later on, so don’t worry about the specific number you pick). Put today’s date in cell A2, and put your net worth today in cell B2. Next month, on the same day, fill in cells A3 and B3, and your change in net worth will automatically appear in cell C3! Overall statistics magically appear to the right of the data table, along with a cool graph.
Can’t a Program Do All of This Automatically?
Everyone should manually calculate their net worth at least once, just to get an understanding of how it works and to come face-to-face with each of their assets and debts one at a time. We’ve been doing it the old fashioned way every month for years, and there is definitely a benefit to logging into each account and having a look around. You’ll be more likely to notice stuff like unredeemed credit card rewards or unusually high spending.
With that said, we’ve had a pretty good initial experience with Personal Capital, a website that connects all of your accounts and tracks your net worth automatically all the time. And it doesn’t cost a dime to use!
We might write up a full review of the service eventually, when we’re more familiar with it. Feel free to sign up for our email newsletter at the bottom of this page so you don’t miss out when we do. Meanwhile, if you want to jump right in and try it yourself for free, you can use our affiliate link to sign up, and we’ll earn a small commission for referring you (learn more). 100% of our affiliate profits go to charity.
— Steven
Update, December 2022: We’ve actually been using Personal Capital happily for about 2 years now and highly recommend it for tracking your net worth.
