On Calculating Your Net Worth

Your net worth shows your true financial health at any point in time. Here is the simplest way to compute it.

You must already know that the easiest way of telling apart a truly wealthy individual from someone that just looks or sounds wealthy is by assessing his or her net worth. It is the same metric that is used by Forbes to tell you who is a billionaire and who isn’t quite there.

The real question here is, do you know how much you are worth? If you are financially conscious, this is one thing you should know at every step of the way. This is because it helps you stay in check of your financial progress (or retrogression) with every financial decision you make.

While a good financial decision or action would increase your net worth, a poor financial decision would reduce it or crash it altogether.

A simple example of this is that when you spend money, say by making purchases, you either move wealth to your asset account (when you buy an asset), lose the money completely (when you spend on regular or one off expenses) or incur debt (when you spend out of a credit card especially on something without a corresponding or expected financial gain.)

Your net worth is simply a measure of your value in financial terms and it gives you a true representation of your financial health at any point in time.

To compute your net worth, subtract all your liabilities from all your assets.

An asset is any resource that is owned by an individual or organization, having an economic value that has the potential to provide future benefits. As such, it must be something that can be transferred to cash at some point or the other.

When computing your net worth, your assets are resources that fall under the current asset umbrella like available cash, fixed assets like land and buildings, investments such as investments in stocks as well as intangible assets.

In other words, items that would be on the asset side of your computation range from whatever buildings you own, the value of your cars, any other big machinery, the amount in your savings accounts, investment in retirement accounts etc.

Liabilities on the other hand are financial obligations that would arise at some point in the future. Simply put, it represents everything you owe that must be paid over time either through cash, or the delivery of goods or services.

While computing this is as easy as summing up all you own and subtracting what you owe, that is assets minus liabilities, knowing what falls into what class is a challenge you just might face.

Some assets, while falling under the asset category on the balance sheet, do nothing in terms of increasing your net worth. Also, estimating the value of the assets in question without overstating or understating your provisions might also pose a challenge.

In our next post, we would consider what assets can be used in determining your net worth, how to properly value assets, and the role your investments would play.

Written by Lawretta Egba.