How do you determine how well you are doing financially? There are many money “scores” out there, including credit rating (a.k.a. FICO score) or financial independence score. But the best way to get a baseline score and track how well you are doing year after year is to calculate your net worth.
Net Worth = Assets (-) Liabilities
What comprises assets? These are the things you own that you can assign value. For instance, how much can you sell your house for today? How much would someone pay to buy your car? How much do you have in savings accounts? These are all considered assets because they add value.
Liabilities account for any debts owed. For instance, if you sold a home with a mortgage, would you be able to capture all the money from the sale? No. A mortgage is borrowed money that you have to pay back. The amount you earn is what remains after the mortgage debt is paid off. Therefore, in this case, the mortgage is a liability, since it takes away value from what you own. And liabilities don’t only apply to tangible items, like homes or cars. Student loans and credit card debt count as liabilities too.
Net Worth Sample Calculation
- $400,000 House
- $ 40,000 Car
- $ 40,000 Savings Accounts
- $200,000 Mortgage
- $ 20,000 Car Loan
- $ 10,000 Student Loans
Net Worth = Assets (-) Liabilities = $480,000-$230,000 = $250,000
Now that you have a starting number for net worth, repeat the same calculation with updated numbers next year, and the next year, and so on. This will be your very own financial scorecard. And net worth should follow the same rules as any game. Stay positive and keep it up!
Tune in next week to learn about cash flow and how it relates to net worth. Or subscribe below to automatically receive weekly lessons in your inbox!
Homework: What is your net worth? Jot down all your assets and liabilities, and see what number you come up with!