4 minute read

Net Worth 101 - How to Calculate Net Worth

Your "net worth" plays a crucial role in setting up and updating your estate plan. But how can you calculate your net worth? Trust & Will explains.

There are so many ways to measure a person’s wealth. You can consider bank accounts, tangible assets, credit scores, and more. However, one measurement stands out for its simple formula and consistent results: net worth. 

Calculating net worth is a great way to gauge overall financial health -- information that can strengthen your approach to wealth management, Estate Planning, and even retirement decisions. Keep reading to learn exactly why net worth matters and how to determine yours: 

What Does “Net Worth” Mean

Net worth is a measurement of an individual’s total assets and wealth, minus the amount of debts and liabilities they owe. It is frequently used in reference to the wealth of investors or celebrities, but anyone can determine their own net worth. 

The purpose of this calculation is to take a closer look at one’s finances, particularly the ratio of assets to liabilities. Many individuals use this number as a frame of reference when making long-term financial decisions, such as Estate Planning. This can be especially important to high net worth individuals, who may have significant assets to manage. 

There are no universal standards of a good or bad net worth, and the number can change dramatically over time. Instead, think of net worth as a personal assessment. It is even possible to have a negative net worth, especially if you carry a large amount of debt. 

What Are Assets and Liabilities?

Assets are anything you own of value, including cash and savings. Common high-value assets would typically include a house, car, boats, rental properties, and other forms of property. Bank accounts would also be included in assets, including retirement accounts and investment accounts. 

A liability is any debt that you owe. While the term “liability” is frequently used in legal settings, in finance it refers to debts or outstanding money. Liabilities include student loans, mortgages, medical debt, credit card balances, private loans, and more. Essentially, any money you are actively borrowing (no matter what for) counts as a liability. 

Is Net Worth Actual Money?

Net worth is not actual money. Hearing the net worth of an individual does not necessarily mean they have that amount of funds sitting in the bank. Instead, this measurement captures the amount their total finances are worth (hence the name). 

Further, net worth does not refer to the income someone earns. For example, if you are getting paid $150,000 a year, that salary does not equate to a $150,000 net worth because you are likely spending some of that money as you receive it. 

Net worth can only be built up by saving your money, acquiring assets that increase in value, and paying off debts. Here are a few examples to better illustrate what does count towards net worth:

  • Real Estate: Any homes or properties that you own count towards your net worth. Essentially you can take the appraised value of the property and subtract the outstanding mortgage amount to determine how much the property will increase your net worth. 

  • Investments: If  you own stocks, options, REITs, or any other form of investment those count towards your net worth. The value can be determined by looking at how much these assets would sell for at the time you are calculating your net worth.

  • Savings: All bank accounts count towards net worth. Interestingly enough, if you are better at saving than a friend who earns a higher salary, you can still end up with a higher net worth overall. 

  • Debt: Any outstanding debts you have count towards net worth, but that does not refer to ongoing expenses. For example, if your car insurance costs $100 each month you would not estimate the future costs in your net worth. You would, however, include the amount left on your car loan as a liability. 

What is My Net Worth?

Your net worth is the total value of your assets, minus the amount of liabilities you owe. The following formula can be used to determine your net worth: 

Assets - Liabilities = Net Worth 

List out your assets and liabilities in a spreadsheet to create your own net worth calculator. This will help you remain consistent over time if you want to compare changes in your net worth. 

How to Calculate Your Net Worth

The net worth formula is simple enough; however, many first-time users struggle when adding up the total value of their assets and debts. Read through our step-by-step guide to better understand exactly how to calculate your net worth: 

1. Aggregate and sum up all your assets

Start by listing out all of your assets and funds, then determine the exact values. There are some assets, such as bank accounts or cash reserves, that will be straightforward. Just take the total amount of money and add them together as assets. 

When it comes to properties or other tangible assets, you will need to estimate the full value. Ask yourself how much money would you get if you sold that item right now? This may require some research on your part depending on the asset. Here are just some of the many assets to include in your net worth: 

  • Checking and savings accounts

  • IRAs, 401(k)s, retirement accounts

  • Real estate property values

  • Tangible assets, such as jewelry, gold, fine art and more

  • Stocks, bonds, CDs

  • Investment accounts 

  • Value of cars and/or boats

2. Aggregate and sum up all your liabilities

Liabilities include any debts that you actively owe. Aggregate these costs by making a list of any balances you currently carry and only include the outstanding amounts. For example, if your mortgage started at $250,000 but you only owe $100,000 at the moment, only the $100,000 counts as a liability. 

Be sure to include any forms of debt you currently have, even if there are just personal loans you are borrowing from family and friends. Here are a few other common examples of liabilities to consider when measuring your net worth: 

  • Mortgages and home loans (such as a home equity loan)

  • Credit card balances

  • Unpaid medical bills

  • Student loan debt

  • Car loans 

  • Personal loans and any other debts

3. Subtract “liabilities” from “assets” to determine your net worth

Once you have your assets and liabilities written out, it’s time for some subtraction. Simply take the total number of liabilities and subtract from your overall assets. The remaining figure is your total net worth. An example will help to better illustrate the calculations. 

Let’s say Cody owns a home valued at $175,000, with $10,000 in savings, and $3,000 in a retirement account. Overall, Cody has $70,000 left on his mortgage, $30,000 in student loan debt, and $2,000 in credit card debt. The value of Cody’s assets would be $187,000 while the value of his liabilities would be $102,000. This leaves us with the following formula: 

$188,000 (Assets) - $102,000 (Liabilities) = $86,000 (Net Worth)

In this hypothetical example, Cody’s net worth is $86,000. To increase his net worth, he can focus on paying down his debts and accumulating more high-value assets.

Create an Estate Plan that Supports Your Net Worth

Net worth is not exactly the first thing that comes to mind when financial planning, but this metric can actually be a helpful tool when thinking about your future. As you acquire assets (and even debts) throughout life, net worth can signal when it’s time to think about protecting them. 

For example, by looking at your net worth, you can gain a better idea of when to start an Estate Plan. This process will allow you to designate certain assets for your family and loved ones, while setting aside other funds to pay for your remaining debts. Trust & Will is here to help as you begin managing your financial affairs and Estate Planning. 

Net worth is one of several ways to measure your financial health over time. This calculation takes all of one’s assets and debts into account, providing a clearer picture of financial status. The purpose of this process is not necessarily to become wealthier, but instead to track important financial decisions. Net worth can be a great marker when it’s time to buy a house, create an Estate Plan, or think about retirement. 

Is there a question here we didn’t answer? Reach out to us today or Chat with a live member support representative!