How to Calculate Your Net Worth

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How to Figure Out Your Net Worth

Pretty straight forward stuff here, right? 

Perhaps we should take a deeper look, just to make sure we are all on the same page.

The first step I recommend taking is to tabulate what you possess that holds financial value. These are your assets. Calculate your assets by adding up the present value of the following categories to find the present value of your assets.

• Cash Accounts
• Checking
• Savings
• CD's
• Bonds
• Securities
• IRA and Employer retirement accounts (401(k), 403(b), etc.)
• Annuities 
• Equity in Your Home and Other Residences
• Value of Land or Land Equity

Next, we need to figure out what you owe. This is also known as your liabilities. Add up the following categories to find your liabilities.

• Student Loans
• Car Loans
• Mortgage(s)
• Taxes Owed
• Money Owed to Suppliers
• Court Fees outstanding
• Other Fees outstanding

Subtract the total number found for your liabilities from your assets, to get your net worth. In other words... Net Worth = Assets (present value) - Outstanding Liabilities

Your net worth with fluctuate over time

In other words, it is snapshot unique to the day and time that you calculated it. It will go up and down with fluctuations in the market and differing seasons of saving and spending throughout the year. This also means that just because you got to a point where your net worth crosses a certain threshold, it may not stay there forever. The present value of your net worth is very transient. It is based on both individual behavior and market behavior. 

A word of caution: purchasing a depreciating asset (like a boat) is nearly as bad as any other liabilities.

• Say you purchase a speed boat for $100k and sell it down the road for $40k (if you're lucky), you have lost $60k of net worth in the process of owning that boat. What's worse, if you would have instead invested that $100k in a low cost index fund for the 10 years, instead of owning the boat, you could have $215,892 in 10 years assuming an 8% annual return (take a little more off for taxes on long-term gains of course). In reality, that makes the purchase of a boat, otherwise held for 10 years, a total cost of $175,892 - the loss of $60k in value of the boat over 10 years plus the loss of investment income of $100k invested over 10 years assuming 8% return.

What should my net worth be?

My favorite simple equation for determining how much you "should" be worth is based on annual income and your age. It comes directly from the book The Millionaire Next Door by Thomas Stanley.

Expected Net Worth = (Age x Pre-tax Annual Household Income)/10

I really like how this equation actually provides an excellent reflection of your spending vs. accumulating behavior to date.

Essentially, if you make $600,000 a year and you are 50 years old, with a present net worth of $450,000, you are actually a fairly poor accumulator of wealth. Per Stanley's equation, you should be worth $3 million!

Tell us what you think in the comments below. Are you worth what you should be? Are you now motivated to save and invest even more than you already have?!

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