What Is ‘Net Worth’ and Why Should I Calculate Mine?

 

What Is Net Worth - Money Tree

Net worth is any asset owned minus any debt owed. Everything you own falls under “assets” and everything you owe falls under “liabilities”. So if you added up the value of your assets (everything you own: home, cars, savings accounts, investments, etc.) and subtracted the value of all of your liabilities (debts such as: loans, mortgage, credit card balances etc.), you would have your total net worth. The calculation is simple:

Assets – Liabilities = Net Worth

If your net worth is in negative numbers (which is very common in Canada) then your net worth tells you how much debt you’d still owe if you sold all your major possessions and put every dollar in your account towards your debt.

How To Calculate Your Own Net Worth

  • List all your assets: cash, savings, checking account balances, investments, retirement savings, bonds, stocks, home, cars etc.
  • List all your liabilities: any debts including credit card balances and loans (such as student loans, car financing/loans, mortgage)
  • Add up the totals of each category and subtract your liabilities from your assets.

Here’s an example:

A couple have a home worth $1,500,000, an investment portfolio with a market value of $500,000 and cars and other assets valued at $90,000.

Their liabilities include an outstanding mortgage of $500,000, a car loan of $50,000 and a student loan of $15,000.

Their net worth would be [$1,500,000 + $500,000 + $90,000] – [$500,000 + $50,000 + $15,000] = $1,525,000.

If you’d like an even more comprehensive example, we highly recommend checking out Mr. Money Moustache’s blog post on net worth.

(PS. if you are the holder of copyrights, patents or other intellectual property you may need to calculate your tangible net worth, which is the sum of all your tangible assets minus the total amount of your liabilities. You can learn more about tangible net worth here.)

 

Why It’s Good To Know Your Net Worth

Net worth is used when talking about the value of a company or in personal finance to assess an individual’s net economic position. It’s a key measure of how much you (or an entity) are worth (in an economic sense only! You’re undoubtedly an awesome human being).

Knowing your net worth, and tracking it over time tells you whether or not you’re in debt – and if you’re making progress in eliminating that debt, or if you’re continuing to spend beyond your means. A steady increase in your net worth is a sign of good financial health, whereas a decrease is a big fat red flag, and a sign that you’re not in control of your finances.

An app like the WealthPlus Net Worth App easily calculates and keeps track of your net worth, helping you monitor progress and motivating you to get you out of debt (if you have any).

Tips to Increase Your Net Worth:

  • Pay off your debt: Target high-interest debt first and/or consolidate your debt by taking out a loan at a lower interest rate. Know what you owe and create a plan to pay it back.
  • Find new sources of income: Increase your income by taking on a second job, freelancing, tutoring or crafting and selling on eBay. Put your skills or talents to good use!
  • Save at least 25% of your monthly income: Build an emergency fund and save for retirement by aiming to put at least a quarter of each paycheque away. And top up those savings with any income tax refunds.
  • Grow your money: Make your money work for you by investing in index funds or blue chip stocks that have a long history of growth.
  • Budget and spend less: Create and stick to a budget (learn how to do that here) to help you see where all your money is going. The basic goal: spend less, save more. Give each dollar coming in a job before you receive it – whether that’s to pay down debt, buy groceries, pay bills, add to retirement savings or a vacation fund. Many people receive money, spend it, only to realize later that they haven’t allocated anything to savings. If you’re having trouble with personal spending, try the Mint Money Manager App.

If you need personalized advice on increasing your personal net worth, make an appointment with Signature Financial. We help clients all over Canada crush debt and save smarter everyday, and we’d love to help you too. Phone 807 623 1915 or email admin@signaturefinancial.ca. If you can’t see us in person because you’re too exhausted by all that debt you’ve been carrying, we can chat via Skype.

 

Image credit: Freepik.com

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