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Your Net Worth is a very important personal finance metric! This will tell you how much money your assets are really worth. It can also tell you how close you are to being Financially Independent. This 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 important to get it right.
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.
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 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.
Many people are surprised to find that their net worth is very different from what they expect.
For instance, many people with high income and a lot of assets are thinking that they have a high net worth. But a lot of time, these people also have a lot of debt. When they take everything into account, their net worth can be very small.
On the other hand, some people that have lived frugally can have a large 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 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 account for things that are liquid enough that you can liquidate them fast.
- You should not account for things that are depreciating too fast
- You should be very careful about accounting for things value. It is not as easy as taking that value you bought the item for.
Let’s see what are the main assets and how to calculate them into your net worth.
The first thing you should consider as an asset is your cash.
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 also the cash 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! Overall, your cash should not account for much of your entire net worth.Neon Neon is the best digital bank in Switzerland. And it is free!
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2. Bonds and Stocks
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 or 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.
3. Retirement Accounts
Not everybody is accounting for retirement accounts in their 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.
4. Social Security
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.
5. Real Estate
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.
If you own a piece of business, you can also include it in your net worth.
For instance, that could be a startup you invested in. Or that could 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 very difficult to get a good 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 really want a good estimation.
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. 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 get 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 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 think we should not count on inheritance to increase our net worth. But this may be different for people coming for 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 a 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. Term life insurance should not be used 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 life insurance could be taken into account. This is when it is tied to retirement. This is really common in Switzerland. Indeed, you can have a third pillar linked to a life insurance.
If you decease before retirement, your family will get the payment. But if you reach retirement age first, you will get the payment 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 is a bit difficult to know the correct value into account. You do not want to account for the full value 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 the monthly value of my policy 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 in my net worth!
Finally, if you have whole life insurance with cash savings, you should also account for this cash savings part. You should not account for death benefits, only the cash savings value.
9. Other Assets
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 + Bonds + Stocks + Retirement Money + Real Estate + Rental guarantee + Life Insurance + Real Estate + Misc assets
This should be reasonably easy to get all these values.
Your liabilities are everything you borrowed from other people. This 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 really need to be aware of that.
Contrary to a lot of 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, 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.
3. Student Loans
If you got a loan to do your studies, you should definitely include it in your liabilities.
Fortunately, in Switzerland, very few people have student loans. But in the United States, for instance, many people have student loans and they can be very large.
This 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 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 + Student Loans + 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
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 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). 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 personally, 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 number are going into.
For instance, here is the graph of my net worth since I started keeping track of it:
It was not very eventful so far! There is a small jump every time we receive our salary.
If your goal is to reach Financial Independence (FI), your current net worth is a very important 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.
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 really does not pay to think you have more money than you actually have!
Now, if you want to increase your net worth, there are many ways to go about it.
Personally, I believe that the most efficient way to do that is to first tackle your high-interest debt. This is your credit card debt and maybe your student loans. This is debt that is very costly because of the payments you have to do.
Then, you also need to increase your returns on your money if you want to accelerate the growth of your net worth. If you have access to a high-yield savings account, this is a good place to start. Then, investing in the stock market is your next action.
Finally, you should try to optimize your budget in order to save money each month. There are many money-saving tips that you can try to save more. Increasing your income is also a very good 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. I personally think that 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, there are plenty of them available on the internet. And you can use all of them for free. Here are a few that I liked:
These are my personal 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.
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 a very 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 wrote the first version of this article, my net worth was around 88000 CHF. One year later, it is sitting at around 190’000 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?