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Your Net Worth is a fundamental personal finance metric! It will tell you how much your assets are worth or how much you are worth. It can also tell you how close you are to being Financially Independent. Your net worth is one of the best personal finance metrics that you should always keep track of.
Computing your net worth is not very difficult. However, there are some subtleties when doing. And it is essential to get it right.
In this article, we are going to see how to calculate your net worth. It will tell you how much your possessions are worth. 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.
So, let’s get into it!
Your Net Worth
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 detail how you can calculate these two parts. Once you know your net worth, you will have a better idea of where you are.
Many people are surprised to find that their net worth is very different from what they expect.
For instance, many people with high incomes and many assets are thinking that they have a high net worth. But a lot of times, these people also have a lot of debt. When they take everything into account, their net worth can be tiny or even negative.
On the other hand, some people living frugally can have a significant net worth.
First, you will need to compute the sum of your assets.
Your assets are everything you own, of value. I say of value because you should not account for every single small thing in your net worth. There are a few rules you need to be aware of when you take assets into account:
- You should only account for items that are liquid enough.
- You should not account for things that are depreciating too fast.
- You should be very careful about accounting for the value of things. It is not as easy as taking the cost you paid for the item.
Let’s see what the main assets are and how to calculate them into your net worth.
Your cash is the first asset you should consider.
First, this is the cash you have in your wallet and at home. Some people may have some cash in a safe as well. Then, it is the cash in your savings and checking accounts. This cash is directly available.
Once again, there is no need to count the pennies in your swear jar! Overall, your cash should not account for much of your entire net worth. If cash makes a lot of your net worth, you should consider starting investing.
2. Bonds and Stocks
Then, you should also account for your invested money. This cash is mainly the money in your broker account. It could also be the money you have in stocks, bonds, or Certificate of Deposits. It 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. If you are using a Robo-Advisor, you can also account for it here.
Be careful about the currencies of each investment. You should convert everything into your base currency. For instance, I convert everything to CHF before doing the sum.
3. Retirement Accounts
Not everybody is accounting for retirement accounts in their net worth. I advise you to do it. It will depend on your goal and on why you want to grow your net worth.
Before we see how to do it, let’s see why you should integrate your second pillar into your net worth. Why would one want to integrate the second pillar into the net worth? One could argue that you cannot take it out before retiring. And it is also possible that we may not be able to take it out as a capital at all in the future. Nevertheless, it is your money!
Even if you do not take it out as a capital, it will grant you a pension. This pension will help you in retirement and, as such, should be part of your retirement plan.
Another good reason is to have a complete picture of your assets! The only way to have a good idea of your asset allocation is to take all assets into accounts.
Now, let’s discuss how to integrate the second pillar in your net worth! This is fairly simple.
Every month, I contribute to my second pillar with my salary. And every month, I can log in to my second pillar account to see how much money there is. If you cannot see the monthly value with your second pillar, you can use the monthly contribution and add this to your current second pillar value. You should not forget to double that value since your employer is generally matching your contribution.
And once you get a final number from the second pillar, usually once a year at least, you will be able to update to get the actual number.
For the third pillar, you always know exactly how much it is worth. So you should account for it. But, there are also limitations when you can withdraw the third pillar.
Nevertheless, your third pillar is an integral part of your net worth. And it should be accounted for properly.
4. Social Security
Now, if your country has social security, you may consider integrating it. However, it is not easy 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 in your country, it could be different. In Switzerland, the first pillar is social security. You cannot take it as a lump sum, and therefore, I do not include it in my net worth.
5. Real Estate
You should take the value of your real estate properties 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 home.
There is something you need to account for if you own real estate. If you sell it, you will have to pay some fees for it. In general, you will lose about 5% of the value of the property when you sell. It is due to real estate taxes, notary fees, and realtor fees. These fees 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. It is a particular bank account tied to you and the house owner. Unless you have significant repair works when you leave your house or apartment, you will get the money back. So you should account for it in full.
If you own a piece of business, you can also include it in your net worth.
For instance, that could be a startup in which you invested. Or that could be a piece of a company that you own partly.
Now, you have to be very careful in estimating the value of a company. It is challenging to get a reasonable estimate. You need to be conservative in its value. You may think it is worth a lot of money. But you may be biased. You should rely on external evaluations if you want a good estimation.
Some people like to take their inheritance into account in their net worth. I think it is a bad idea since it is variable on both the sum and the time you will receive it. And there is never any guarantee on that.
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 give you, you can include it in your net worth. But you should still be aware that this number can change. And you still have no idea of when this is going to happen.
If I were to count my inheritance in my net worth, I would only account for a portion of it. For instance, let’s say you know you will get 100’000 CHF as an inheritance from someone. You should account for half of it only, or even only a third of it. It 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 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 think we should not count on inheritance to increase our net worth. But this may be different for people coming from a wealthy family.
8. Life insurance policies
Now, some people may also have life insurance policies. There are some cases when you want to account for that in your net worth.
If you have term life insurance, you should probably not account for it. You will only get something if you die. And you cannot know if this will happen before or after the term. You should not use term life insurance for your net worth. It should be used to help the people that are depending on you. Since nothing is guaranteed, you do not want to account for that.
Now, there is a case where you could take life insurance into account. It is when it is tied to retirement. It is widespread in Switzerland. Indeed, you can have a third pillar linked to life insurance.
If you decease before retirement, your family will get the payment. But if you reach retirement age first, you will get the amount directly. In that case, I think it should be taken into account since it can be paid in full if you reach a certain age.
Sometimes, it is a bit difficult to know the correct value. You do not want to account for the full amount because it is too far in the future. But you can account for the current release value. You can ask your life insurance provider for the release value over time of your policy.
For instance, in my case, I got the details of the value of my life insurance year by year until I retire. From this, I can estimate my policy’s monthly value by calculating the difference between two consecutive years. I made a big spreadsheet with this, and it gives me the current value of my life insurance to account for my net worth!
Finally, if you have whole life insurance with cash savings, you should also consider this cash savings part. You should not account for death benefits, only the cash savings value.
9. Other Assets
Finally, there are the value 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. But, I do not account for the value of my vehicle. It has very low value, and the depreciation of a car is significant.
If you are a collector, your collection could have some value. For instance, paintings, stamps, or coins can have good value. 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. It is something essential to consider. Again, I do not account for anything here. Once I sell something, I add it as an earning on my budget.
It gives us this formula for the value of your assets:
Assets = Cash + Bonds + Stocks + Retirement Money + Real Estate + Rental guarantee + Life Insurance + Real Estate + Misc assets
It should be reasonably easy to get all these values.
Your liabilities are everything you borrowed from other people. It is money that you owe and not money that you own.
The most common liability for people is a mortgage.
If you have a house or an apartment, the first item in your liabilities is generally your mortgage. That is the amount of money you owe to the bank.
A lot of people consider that their home belongs to them. But this is not true. It belongs mostly to the bank. You need to be aware of that. For instance, we only own 20% of our house. The rest belongs to the bank. If we would not pay the interest payments, they could seize the house.
Contrary to many people, I do not believe there is anything wrong with having a mortgage and even keeping it. It is generally a low-interest debt that you do not have to repay fast. But repaying it could lower your interest payment and improve your budget, especially in retirement.
2. Credit Card Debt
A second liability that people have is 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. You will pay it next month. But some people decide to include it in their liabilities in their net worth. It is also acceptable.
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.
I do not have any credit card debt, and I do not include my credit card bill in my liabilities.
3. Student Loans
If you got a loan to do your studies, you should include it in your liabilities.
Fortunately, in Switzerland, very few people have student loans. But, in the United States, many people have student loans, and they can be substantial.
It is also some money you owe to a bank and, as such, should be removed from your net worth.
4. Other Loans
The last pack is composed of leasing and loans. The most obvious example would be car leasing or loans. If you have a car in leasing, it is not yours. It belongs to the company that lent you the money. If you are serious about your personal finance, you should not have any car loans.
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 + Student Loans + Leasing + Personal Loans
It is not very difficult. Hopefully, you will only have your mortgage in this category or nothing if you do not own a house.
In our case, the only liability we have is our mortgage. So, we have to deduct the mortgage from our net worth.
Keep track of your net worth
Now you have all the pieces to calculate your net worth.
Once you have got all your numbers, you should keep track of them. It is an excellent thing to see how your net worth is progressing over time.
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 not to 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). However, this tool is not free, and I do not think anybody needs to pay for a budget application. Many free tools can do that for you.
But I think that these are basic things that most people should be capable of doing themselves. It helps a lot if you know exactly where all the numbers are going.
For instance, here is the graph of my net worth over a year:
It was not very eventful so far! There is a small jump every time we receive our salary. Since our net worth is fairly low, it does not increase much with the stock market. Our income has been the main driver of our net worth so far.
If your goal is to reach Financial Independence (FI), your current net worth is a fundamental personal finance metric. It will help you compute your FI Ratio. You can see how to calculate your FI ratio based on your net worth.
Other Net Worth
What this article defines is the most common form of net worth. It represents your entire assets. But you can compute a few more net worth if you want.
Let’s see some of the other forms of net worth.
The FI Net Worth
The FI Net Worth is related to Financial Independence. If you plan to retire by using a withdrawal rule, you should not consider all your assets.
Your net worth’s formula remains the same, but you will only consider some of your assets. If you can use this asset to sustain your retirement expenses, you can include it in your FI Net Worth.
For instance, cash and retirement accounts are part of this FI net worth. But your primary residence is not part of this. If you sell it, you will either need to buy another one or start renting. In the first case, you will not increase your net worth. In the second case, you will probably increase your expenses.
Another example is your car. If you have a car, it means you need it, so you will not sell it to sustain your expenses. And given the depreciation on the car, it is probably not a great asset anyway.
So, to get your FI Net Worth, you need to sum all your FI assets and remove all your liabilities.
If you want more details about this net worth, I have an article about the FI Net Worth and why it is important.
The Liquid Net Worth
Another form of net worth that can be worth tracking is your Liquid Net Worth. The idea is to only take your liquid assets into account for this net worth.
An asset is liquid if you can quickly transform it to cash in your bank account. For instance, your stocks and bonds in the stock market are very liquid. At worst, it will take a few days to reach your bank account.
On the other hand, your real estate properties are not liquid at all. It may take months to liquidate a property. So you should exclude these assets from the liquid net worth.
The same is true from your retirement accounts. Unless you are already retired, they are not liquid at all.
So, the Liquid Net Worth formula remains the same as the basic net worth except that you only consider very liquid assets.
This form of net worth can be useful in two cases:
- In case of emergency, if you need a large amount of money.
- In case of a large buying opportunity (for instance, the house of your dreams at a fair price)
I am not yet tracking our liquid net worth, but I plan to do so in the future. For now, almost everything we own is very liquid. But of course, our house is definitely not liquid!
Net Worth Tips
You should be very careful with how you estimate the value of some of your assets. For instance, it is not easy to get the exact value of a car. Therefore, you should use a conservative estimation. It does not help to think you have more money than you have!
You should try to split the assets from your net worth into categories based on their risk. For instance, bonds and the second pillar are likely to have the same risk level. Stocks will have the highest risk level. And cash will have the lowest risk level. Doing so will help you have a good picture of your overall asset allocation. This is very important to understand where you stand!
Now, if you want to increase your net worth, there are many ways to go about it.
I believe that the most efficient way to do that is first to tackle your high-interest debt. It is your credit card debt and maybe your student loans. It is debt that is very costly because of the payments you have to make. Paying it back will increase your net worth. And it will also help you save more in the future.
Then, you also need to increase your returns on your money if you want to accelerate your net worth growth. If you have access to a high-yield savings account, this is an excellent place to start. Then, investing in the stock market is your next action.
Finally, you should try to optimize your budget to save money each month. There are many money-saving tips that you can try to save more. Increasing your income is also a perfect way to increase your savings! The more you save, the faster your net worth will increase.
Now, some people do not like to do the calculations themselves and prefer to use calculators. It is much better if you can compute and track your net worth yourself. A simple Excel or Google spreadsheets will do that very well. You can also save the results. Moreover, it has the advantage that you can use it to track the value over time.
However, if you really want to use a net worth calculator, plenty of them are available on the internet. And you can use all of them for free. Here are a few that I liked:
These are my favorite calculators. But there are many other calculators out there. Feel free to do your research to find better ones. Let me know if you find a great one. Keep in mind that I am not using one.
In summary, your net worth is the value of what you own minus the value of what you owe. If you sold all your valuable things and cashed out all your accounts, and paid all your debts, then you would be left with your net worth.
Your net worth is a fundamental 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 primary goal.
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?