In this post we are going to see how to calculate the amount of your net worth. You net worth is 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’ll 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
Let’s see in details how these two parts can be calculated.
Your assets are everything you own, of value.
The first thing you should consider 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.
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 don’t 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 your base currency. For instance, I convert everything to CHF before doing the sum.
Third is your retirement money. This includes the second pillar and third pillar. Not everybody is accounting for the second pillar into the net worth. I advice 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’s worth. So you should account for it. But, there are also limitations in when you can withdraw the third pillar.
The value of your real estate properties should definitely be taken into account. If you own a house, you should account for it in your net worth. Be very careful for 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 house’s real value.
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’ll get the money back. So you should account for it in full.
Finally, the values of some assets you could sell. I’m not talking about any single book in your home. It could be your car, if it’s valuable. I don’t account for the value of my car. It has very low value and the depreciation on 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 don’t account for anything here. Once I sell something, I simply add it as an earning on my budget.
This gives us this formula:
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. Don’t forget the interests when you calculate the amount of your mortgage.
If you use a credit card, you will most likely have to get your current credit card bill. I’m talking here about the bill for next month. If you have credit card debt, you should also include it. You should quickly work on paying off your credit card debt. You pay very high interest on your credit card debt. Unless you have huge amount on your credit card bill, you may also choose to not include it in your net worth. It will be paid next month and reflected on your net worth anyway. This is what I’m doing.
The third pack is composed of leasing (loan). The most obvious example would be a for a car leasing. If you have a car in leasing, it’s 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, don’t 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 again in a formula:
Liabilities = Mortgage + Credit Card Bill + Credit Card Debt + Leasing + Personal Loans
This is not very difficult.
Keep track of your net worth
Once you’ve 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. You would be left with your net worth.
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.
My current net worth is around 88000 CHF. You can take a look at my net worth page to get more details.
What about you ? How are you computing your net worth ? Are you doing something different ?