First, you may be wondering what is net worth in the first place?
Net worth is a simple calculation. You add up all your assets ( what you own), then subtract what you owe ( your debts and liabilities). The number left over is your net worth.
Assets - Liabilities = Net Worth
To me, net worth is equivalent to taking your blood pressure. It gives a reading that will tell us how healthy you are financially. I calculate if for every financial plan I've ever created. I love to compare these net worth snapshots over time. It really helps the client see their progress for wealth creation or preservation.
Here's why it's an important number to calculate and to know:
First, it tells you where you stand financially. It's a measurement. A benchmark if you will. If your net worth is very low or negative then you probably haven't been a good saver. Or, you've just started out and have very little assets and perhaps some student debt. Either way it is a progress meter. If your net worth is very high, then it means you've saved and limited your spending.
Second, it will reveal if you are racking up too much debt. When you calculate your liabilities you'll clearly see if this reduces your net worth. In some cases it can be significant. It can even give you a negative number. Then you know you have a debt problem that needs to be worked on and reduced.
Third, it can reveal if you have too much of any one asset. Such as real estate or cash. When you add up all your assets and a large percentage is in for example large cap stocks, real estate or a hoard of cash then that's a signal you're not as diversified as you thought. Those are just examples of assets but you get the idea.
Calculating your net worth is as simple as whipping out a notepad and a pen. You don't need a sophisticated piece of software for the job.
If your situation is fairly complex, then you may want to create your financial plan and have a pro get to work for you. It will give you and your advisor a starting point for change...or congratualtions.
If you liked the article, you can get my weekly money mumblings by subscribing right here for free. I'll have my virtual paperboy toss one in your inbox every Friday.
