Expanded Lesson 4 min read
Dec 20, 2021
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Your net worth all comes down to assets and debts. Everyone owns a few assets and you may have a few debts or liabilities as well. Calculating your net worth shows you how much you’re worth in terms of dollars and cents. It’s how much you own or have minus everything you still owe. Use this simple guide to learn how to calculate your net worth.
Lesson Notes:
- Your net worth can be an indicator of your financial health. Ideally, your net worth should grow over time as you save more and pay down debts.
- Your net worth can be calculated by subtracting all of your debts and liabilities from your assets.
- You may have items that are intangible or difficult to sell that may be excluded from calculations used by financial institutions to determine loan eligibility.
LESSON CONTENTS
What Does It Mean to Calculate Your Net Worth?
You can calculate their net worth by adding up all your assets while subtracting their outstanding liabilities from the total. Regardless of where you are in life, you may be curious to learn how much you’re worth — at least on paper.
There are several good reasons to calculate your net worth. A financial institution may ask for your net worth when evaluating your application for a home, business or auto loan. Calculating your net worth gives the bank or credit union an idea of how much you’re worth if you default on the loan.
You may need to calculate your net worth when signing a prenuptial agreement, meeting with an accountant or financial planner or paying your taxes. Many businesses regularly generate net worth statements to send to investors and regulators.
Your net worth can also be an indicator of financial health. Most people tend to grow their net worth as they pay down debt, save more and receive salary increases. You may want to keep tabs on your net worth as you start saving for retirement as well.
Simple Net Worth Calculation
A simple net worth calculation means adding up your total assets and subtracting your debts, often referred to as liabilities.
Assets include everything you own, including how much money you have in your checking or savings account, real estate equity, savings and investment plans and items with a clear market value (car, jewelry, clothes, art, etc.).
Liabilities include all outstanding debts, including the remaining balance on your home, car, business or personal loan, credit card debt, student loans, back taxes and anything else you still owe.
To calculate your net worth, use the following equation:
ASSETS – LIABILITIES (DEBTS) = TOTAL NET WORTH
With Ent's Money Insight, users have the ability to track all their accounts in one place to visualize their current net worth and watch it adjust over time.
Tangible Net Worth Calculation
Your tangible net worth is something different. Some people own what is known as “intangible possessions,” or items that would be difficult to sell. Most possessions are tangible, which means they are physical and capable of being held. They also have a clear market value.
Intangible possessions are items that don’t exist in physical forms, such as intellectual property (IP), trademarks, websites, certain businesses and patents. These items have value but selling them requires a certain amount of expertise.
If you own intangible possessions, you may need to calculate your tangible net worth, which means removing these possessions from your total net worth.
Your tangible net worth will always be lower than your simple net worth. So why would you subtract these kinds of possessions?
Financial institutions often ask for tangible net worth instead of simple net worth to get a better idea of how much they can expect to recoup by selling your assets should you default on a loan. They may have trouble selling your IP, trademarks and other intangible assets. Some of these items may take months to sell on the market, assuming there’s a buyer. Calculating their true value may also be up for debate.
To keep things simple, credit unions and banks often rely on tangible net worth when evaluating loan applicants. Cars, homes, jewelry, and other items are easy to sell with clear values, making them a tangible part of your net worth.
If you are looking to calculate your tangible net worth, use the following equation:
ASSETS – LIABILITIES (DEBTS) – (INTANGIBLE ASSETS) = TOTAL TANGIBLE NET WORTH
Increasing Your Net Worth
Once you’ve calculated your net worth, you should have a good idea of where you stand financially. The goal is to have a positive net worth, meaning your assets are worth more than your debts. However, if you owe more than you own, you will have a negative net worth.
Don’t be discouraged if your net worth is in the red or not as high as you’d like it to be. Creating a budget can help you save more every month, so you can get out of debt, build wealth and start investing.
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