What is Net Worth and How to Calculate it?
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Your financial health is dependent on many factors, like your income, debt, taxes, family obligations, credit score, and of course, net worth. Net worth gives you a snapshot of your overall financial standing, and it encompasses more than just the money in the bank. Many factors are considered when coming up with a number to define what you’re worth.
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What is Net Worth?
Net worth is defined as the value of everything you own – both financial and non-financial assets – minus everything you owe – loans, debt, and other liabilities.
Assets include everything you own – this includes money in your chequing and savings accounts, as well as cash under your mattress. However, assets are more than just financial items. Your property, furniture, antiques, stocks and bonds, insurance policies, cars, jewellery, and other possessions also count as your assets. Items of minimal value, such as pillows or plates aren’t usually considered part of your assets.
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Liabilities include everything you owe – debts and other financial obligations. Your mortgage, credit card debt, student loans, business loans, child support payments, and other debt all count as liabilities.
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Is Your Income Included as Part of Your Net Worth?
Income refers to all taxable payments you receive from working, or from other kinds of financial support – be it a wage or salary, or disability income from the government. While income certainly contributes to your overall financial health, it isn’t considered an asset. The money you save and invest from your income over time, however, is considered part of your net worth.
Your income alone isn’t enough to assure your wealth, even if you have a big salary. Having a $300,000 salary after taxes doesn’t add to your net worth if you’re spending $350,000 a year on debts and purchases.
How Do You Calculate Your Net Worth?
In simple terms: Assets – Liability = Net Worth
To calculate your net worth, follow these steps:
1. Compile all of your financial documents
Calculating your net worth is a fairly simple process, but you’ll need access to certain documents to accurately calculate it. This includes all your financial documents regarding your assets and liabilities such as your investments, savings accounts, loans, and other debts.
2. Calculate your assets
Start with the largest assets – your home, boat, car, etc. – estimate the current market value of each, and add it together.
For example, if the value of your home is $1 million, your boat is worth $100,000, and your car is worth $20,000, the worth of your largest assets is $1.12 million.
Add your liquid assets (cash, savings and investments), as well as the value of possessions like fine jewellery.
For example, if the value of your chequing and savings accounts together is $10,000, and you have $1,000 in stocks, the total is $11,000.
Your total assets are worth $1,131,000.
3. Calculate your liabilities
Add the value of your mortgage, car loan, credit card debt, and other debts together. For example, if you have $350,000 left to pay on your mortgage, $5,000 in credit card debt and $40,000 in student loans, the value of your liabilities is $405,000.
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4. Calculate your net worth
Assets ($1,131,000) – Liabilities ($405,000) = $726,00 (Net Worth)
How Do I Increase my Net Worth?
There are a few ways to increase your net worth:
Pay Down Your Debt
When it comes to increasing your net worth, paying down your debt is one of the best ways to do so. As mentioned above, your net worth is directly dependent on how much your assets outweigh your debts. Moreover, by paying down your debt, you’ll have more money left over to save and invest in different areas. In general, it’s recommended that you tackle debt with the highest interest rates and work your way down.
Budget Better and Cut Expenses
Reviewing your budget and cutting out unnecessary expenses can help you put more money towards your savings or even bringing down your debt. Budgeting apps are a great way to help you budget and track expenses. Knowing how to budget and being able to stick to it is a financial technique seen in Canadians with high financial literacy. In fact, many studies have shown that budgeting is a key factor in achieving long term financial goals such as buying a house, having a retirement fund and being prepared for financial emergencies.
Find More Sources of Income, like a Side Hustle or Investments that Pay Dividends
Finding different sources of income through side hustles and investments can greatly contribute to your net worth. The more income you have the more you’ll have to save, invest, and pay down debt; the 3 most important factors in calculating your net worth. Some easy ways to earn money are through fun little tasks such as surveys, cash back services, and other minor activities. If you’re looking for a passive income source consider investing in real estate and other investments that pay dividends.
Be Aware of your Liabilities and Assets Always
Periodically reviewing your assets and liabilities will allow you to better plan how to build your net worth. For example, if you notice you have a lot of high-interest debts, you could consolidate them in order to pay it off faster. Similarly, if you notice that the money in your savings account isn’t gaining enough interest and that you don’t plan on using it soon, you could opt to invest it in an ETF, an index fund or some other investment vehicle that will yield higher returns.
Can I have a negative net worth?
- Lots of student debt
- Depreciating assets
- Tendency to overborrow
What’s the difference between income and net worth?
Can someone with a lower income have a higher net worth than someone with a higher income?
Your net worth gives you a general idea of your overall financial health. It’s important to be aware of your net worth to assess where you can adjust your spending and savings behaviour.
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