Calculating your personal net worth helps you measure the progress you are making toward your financial goals. When your personal net worth is growing, you know that you are on the path to financial freedom. Conversely, if you have negative personal net worth, you know you need to take corrective actions as soon as possible. It could be that you have too much debt, are spending beyond your means, or for other reasons, are unable to improve your financial health.
What Does Personal Net Worth Mean?
Simply put, your personal net worth means the difference between your total assets and your total liabilities. For example, if you own $500,000 in assets and $150,000 in total liabilities, your personal net worth is $350,000. Your financial goals should be focused on increasing your net worth. You can accomplish this by reducing your debt or increasing assets.
How to Calculate Your Personal Net Worth
Calculating your personal net worth is easy to do. You can do it yourself with a spreadsheet or use an online tool. Hopefully, you have an accurate record of all your current assets and liabilities.
Begin by adding up all your assets, including:
- Bank accounts
- Investment accounts
- Retirement accounts
- Real estate
- Personal assets (jewelry, furniture, cars, collections, art)
Next, total up your liabilities
- Credit card debt
- Student loans
- Personal loans
- Auto loans
- Other liabilities (debt to family, IRS liabilities, medical debt, other obligations)
Subtract the total of your liabilities from the sum of your assets. The final number represents your personal net worth.
Calculating your net worth should not be a one-time activity. It is something you should incorporate into your routine. It’s one of the best ways to monitor your financial health. A popular time is the first of each quarter. You can use an excel spreadsheet or a fintech tool to calculate your net worth.
Negative Personal Net Worth
Don’t be alarmed if you have negative net worth when you are just beginning your professional life. This is normal. You’ll have student loans and other debt. Your salary will be entry-level, or you might still be job hunting. Perhaps you needed to purchase a car. Therefore, you can expect your liabilities to be greater than your assets. But as your earnings increase, you track and manage your money, and make progress toward reducing debt, your personal net worth will move from negative to positive.
How to Improve Your Personal Net Worth
The healthiest way to improve your personal net worth is to make debt reduction a priority. When less money is going to cover liabilities, more money is available to fund your savings and investment accounts. Make a list of your liabilities and create a strategy for debt reduction.
Create a realistic budget and follow it. Look for ways to reduce your spending so that you can pay more than the minimum on your debt accounts.
When you have extra money, use it to max out your retirement and emergency savings accounts.
Automate your bills so they are paid on time. An excellent bill-paying history improves your credit score. A good credit score helps you get credit at the lowest interest rates possible. You’ll be able to pay off the debt more quickly.
Your personal net worth is a real-time snapshot of your financial health. Monitoring your net worth helps you measure the progress you are making toward your long-term financial goals. When you see that your personal net worth is not growing, or worse that you have negative net worth, then you know you need to make some changes. Look for the leaks in your cash flow and work on reducing debt.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a free financial analysis.
Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high-interest credit card debt any longer.