How to Find Your Financial Net Worth and Increase It

woman with calculator and laptop

Money can bring feelings of joy and relief, and also, anxiety. We have to be responsible with it. Personal financial management is a complex topic, but one that anyone can grasp and build on with the right tools. Net worth is a technical term used in finance to understand your overall state of financial health, and knowing what your net worth is can help you take an important first step to building wealth. We must first recognize where we stand before we can devise plans for improvement.  

Net worth is calculated by finding the difference between assets and liabilities. Assets are items that we own, and some common examples include: cash, savings accounts, money market accounts, certificate of deposit, house, car, boat, furniture, art, jewelry, stocks, bonds, mutual funds, retirement accounts (401k or 403b), and Individual Retirement Accounts (IRA). On the other hand, liabilities are items that we owe, such as credit card debt, car loans, mortgage, student loans, and any other outstanding debt.  Calculating net worth is as easy as listing assets in one column, liabilities in the other column, and subtracting the totals, which is the basis of a balance sheet. 

Your balance sheet might look like the following:

Asset

 

Liability and Equity

 

Current Assets

 

Current Liabilities

 

Cash

$  5,000

Credit Card

$2,000

Savings Account

15,000

Mortgage (current portion)

11,000

 

 

Car Loan

12,000

  Total Current Assets

20,000

 Total Current Liabilities

25,000

 

 

 

 

Long-Term Assets

 

Long-Term Liabilities

 

Car

20,000

Mortgage

130,000

House

200,000

 

 

401k

10,000

 

 

  Total Long-Term Assets

230,000

Total Liabilities and Equity

155,000

 

 

 

 

   Total Assets

250,000

Net Worth

95,000

 

Notice the net worth in this example is $95,000 ($250,000 assets - $155,000 liabilities).  The balance sheet is further segregated between current and long-term. Current assets will be used up or easily converted to cash within 12 months. Current liabilities will be paid within 12 months. Everything else is classified as long-term. By listing your assets and liabilities you can determined your net worth. Categorizing them both into short-term versus long-term lets you put this information into manageable pieces, which makes them easier to address. Tackling too much at one time generally brings about stress and frustration, and neither are productive emotions when it comes to personal financial management.

It’s important to understand the basic components of building financial wellness in addition to your net worth. Now that we have the basis of net worth, we can turn our attention to improving and creating more wealth. There are a few ways to build wealth: acquire more assets or reduce liabilities. Better yet, you can pursue the third option and do both at the same time. To build wealth, we need to specifically save more and pay down our debt. This task is easier said than done, but the right tools can help you build the core skills of personal financial management.

 

To learn more about understanding your financial net worth and getting on the road to financial independence, check out the Personal Financial Management Bootcamp offered through Forbes Bootcamps.

 

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Written by Brenda Forde, CPA, Program Chair Undergraduate and Graduate Accounting, Forbes School of Business & Technology™, and Don Frey, CMA, Core Accounting Faculty, Forbes School of Business and Technology.

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