You've probably heard things like "Jeff Bezos is worth $174B" or "Elon Musk's net worth is now greater than Bezos'", but what does that actually mean? Clearly, it does not mean that the founder of Amazon (and real life Lex Luthor) has 174 billion dollars sitting in a checking account, waiting to be spent on toilet paper and pasta at WalMart.
Simply put, the net worth is the total of one's assets minus the total of one's liabilities. So let's see how to calculate that precisely.
Calculating the assets
This represents everything you own.
We can split these in two categories: physical and monetary assets.
Physical assets may include:
- Real estate,
- Cars,
- Bikes,
- Boats,
- Art,
- Jewelry,
- Musical instruments,
- Furniture,
- TV,
- Phone,
- Basically anything that you can touch and that has value.
Of course, not everything down to your shampoo bottle should be counted here. You can set your own limits, like "everything over $500" or "nothing less valuable than my car". You're calculating this for yourself, so feel free to set your own boundaries.
Try the find the most accurate current value of each item (meaning not the retail price of the iPhone you bought 6 years ago, but what it's worth today). You can use websites like Zillow to estimate the value of your home, Kelley Blue Book for your car and eBay for smaller items.
Monetary assets may include:
- Checking account,
- Savings accounts,
- CDs,
- Retirement accounts,
- Cash value of your insurance plans,
- Bonds and stocks (even the ones you got for free),
- Physical cash in your wallet,
- Crypto portfolio,
- PayPal account,
- Basically any kind of financial asset you own.
These are easier to list, and usually easier to calculate.
Once you have all of this, you can add it all and voila! You have your total assets.
Calculating the liabilities
This represents everything you owe.
Your liabilities may include:
- Mortgage loan,
- Car loan,
- Student loans,
- Credit card debt,
- Basically any kind of debt you have to pay back.
Add it all, and there you have your total liabilities.
Calculating the net worth
Net Worth = Total Assets - Total Liabilities
Great, now what do I do with this number? Well, that's for you to decide. A good thing might be to calculate this every year at the same period, to see how you're doing financially and if you're on track to reach your goals. Or even every month if you're trying to reach a saving goal or a debt repayment goal asap.
Even if you get a negative value it's not necessarily a big deal, by doing this exercise of listing and evaluating everything you own and owe, it can help you figure out what expenses you could cut and help you budget.
Keeping your liquid assets in high yield savings account and repaying your debts as often as possible means you should see your net worth grow year after year!
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