(Disclosure: Some of the links below may be affiliate links. For more information, read my disclosure.)
Your Net Worth is a very important personal finance metric! This will tell you how money your assets are really worth. It can also tell you how close you are to being financially independent. This is one of the personal finance metrics that you should always keep track of.
In this post, we are going to see how to calculate your net worth. It will tell you how much your possessions are really worth, in money. Having a clear idea of your exact net worth is very important. It will help you to see how far you are from reaching your goals. If you keep track of it, you will also see how well you are doing.
The basic idea about the net worth is simple. Your net worth is the sum of your assets minus the sum of your liabilities. In mathematical terms:
Net Worth = Assets – Liabilities
We are going to see in details how these two parts can be calculated. Once you know your net worth, you will have a better idea of where you are standing.
Your assets are everything you own, of value. I say of value because you should not account every single small thing in your net worth. You should account for things that are liquid.
The first thing you should consider as an asset is your cash. This is the cash you have in your wallet, at home and in your savings and checking accounts. This is directly available cash. Once again, there is no need to count the pennies in your swear jar!
Then, you should also account for your invested cash. This is mainly the money in your broker account. This could also be the money you have in bonds, in Certificate of Deposits. This is money that is available, but you first have to sell something. Often you do not want to use this money until retirement. Or until the goal you are saving for is reached.
Be careful about the currencies of each investment. You should convert everything in your base currency. For instance, I convert everything to CHF before doing the sum.
The third thing is your retirement money. In Switzerland, this includes the second pillar and third pillar. Not everybody is accounting for the second pillar into the net worth. I advise to do it. It will depend on your goal and why you account for your net worth. For the third pillar, you always know exactly how much it is worth. So you should account for it. But, there are also limitations in when you can withdraw the third pillar.
Now, if your country has social security, you can consider integrating it. However, it is very difficult to know how much you are going to get in advance. Therefore, I would advise against integrating any pension. If you have the option for a lump sum, it could be different. In Switzerland, the first pillar is social security. It cannot be taken as a lump and therefore, I do not include in my net worth.
The value of your real estate properties should definitely be taken into account. If you own a house or an apartment, you should account for it in your net worth. Be very careful about the estimation of the value of your house. A house may not be worth as much as you think. It could also be worth more. It is difficult to estimate the real value of the house.
There is something you need to account for if you own real estate. If you sell it, you will have to pay some fees on it. In general, you will lose about 5% of the value of the property when you sell. This is due to real estate taxes, notary fees, and realtor fees. This will depend a lot from country to country. I would advise taking this into account in your net worth!
If you are renting in Switzerland, you probably have a rental guarantee deposit. This is a special bank account that is tied to you and the house owner. Unless you have big repair works when you leave your house or apartment, you will get the money back. So you should account for it in full.
Some people like to take their inheritance into account in their net worth. I am not a big fan since it is variable on both the sum and the time at which you will receive it.
First, you should only do that if you already know how much you will get. For instance, if your parents, or another family member, told you the sum they are going to get you, you can include it in your net worth. But you should still be aware that this number can change.
If I were to count my inheritance in my net worth, I would only count a portion of it. For instance, let’s say you know you are going to get 100’000 CHF as an inheritance from someone. You should account for half of it only, or even only a third of it. This will help you not rely too much on it. It is better to account for a smaller number and get a larger one than the contrary! Some people like to account for their inheritance divided by Pi (3.14) or by Phi (1.618).
And you should really be aware that you have no idea of when you will get this inheritance. It could be tomorrow and it could be in thirty years, or more.
I do not think we should count on inheritance to increase our net worth. But this may be different for people coming for a wealthy family.
Finally, the values of some assets you could sell. I am not talking about any single book in your home. It could be your car if it is valuable. I do not account for the value of my car. It has very low value and the depreciation on a car is very important.
If you are a collector, your collection could have some value. For instance, paintings, stamps or coins. Be very careful when estimating this. A car will depreciate extremely fast. If you want to account for it, do not forget to update its value over time.
And some things can take a very long time to sell. This is something very important to consider. Again, I do not account for anything here. Once I sell something, I simply add it as an earning on my budget.
This gives us this formula for the value of your assets:
Assets = Cash + Invested Cash + Retirement Money + Real Estate + Rental guarantee + Misc assets
This should be reasonably easy to get all these values.
Your liabilities are everything you borrowed from other people.
If you have a house, the first item in your liabilities is generally your mortgage. Do not forget the interests when you calculate the amount of your mortgage.
Credit Card Debt
If you use a credit card, you will most likely have to get your current credit card bill. I am talking here about the bill for next month. You should not include this in your liabilities, it will simply be paid next month. But some people decide to include it in their liabilities in their net worth. This is also fine.
On the other hand, If you have credit card debt, you should include it. You should quickly work on paying off your credit card debt. You pay very high interest on your credit card debt.
Personally, I do not have any credit card debt and I do not include my credit card bill in my liabilities.
The third pack is composed of leasing and loans. The most obvious example would be a car leasing or loans. If you have a car in leasing, it is not yours, it belongs to the company you are paying the loan to. If you are serious about your personal finance, you should not have any car loan.
Finally, do not forget about all the money you may be owing to other people. For instance, a loan from a friend or a family member.
To put your liabilities again in a formula:
Liabilities = Mortgage + Credit Card Bill + Credit Card Debt + Leasing + Personal Loans
This is not very difficult. Hopefully, you will only have your mortgage in this category or nothing if you do not own a house. In my case, I have zero in liabilities and this is excellent!
Keep track of your net worth
Once you have got all your numbers, you should keep track of them. It is a very good thing to be able to see how your net worth is progressing over the months and years.
There are many ways to do this. If you are old school, you can do it on paper. But you should probably use a spreadsheet for this. You can use online spreadsheets for free on Google Sheets for instance. Or you can use Excel or any other tool on your computer. Be careful to not lose the data! Another way is to use a budget application for this. For instance, a lot of Americans are using Personal Capital. In Europe, more people are using YNAB (You need a budget). There are many tools that can do that for you.
For instance, here is the graph of my net worth since I started keeping track of it:
It was not very eventful so far!
If your goal is to reach Financial Independence (FI), your current net worth is a very important metric. You can see how to calculate your FI ratio, based on your net worth.
In summary, your net worth is the value of what you own minus the value of what you borrow. If you sold everything of value you got and cashed out all your accounts and paid all your debts. Then, you would be left with your net worth.
I believe that this is an important metric. It should grow over time and you should track its progress. Also, If your goal is early retirement, increasing your net worth should be your main goal.
When I wrote this article, my net worth was around 88000 CHF. You can take a look at my net worth page to get the last values, month after month. I am trying to update my net worth every month. You can also follow my Monthly updates if you want to get new information every month about the details of my net worth and finances.
You need to be aware that all your assets are not equal in your net worth. One thing you may want to do is compute your FI net worth for Financial Independence.
What about you? How are you computing your net worth? How much is your net worth? Are you doing something different?