The term “net worth” might make you think it’s something that matters only to people with lots of money. However, it’s a fact that net worth is important for pretty much every person, especially those who are dead serious about being better when it comes to managing money.
If you haven’t done the math to find out your net worth, this could be your sign to start keeping track. Want to learn why and how? Just keep reading.
What it is
Put simply, net worth is the amount by which your combined assets exceed your combined liabilities. It can also be stated as “the difference between what you own and what you owe.”
An asset is anything that has monetary value, like savings in a bank account, investments (like a Unit Investment Trust Fund or UITF), a condominium unit, and even a laptop. On the other hand, a liability is an obligation that involves reducing your resources to fulfill (like bank loans, mortgages, and installments).
If your assets are greater than your liabilities, then you have a positive net worth. If they’re lesser, then your net worth is negative.
An amount is valid as your net worth only for the point in time in which you calculated it. That’s because any assets that you add and any liabilities that you make will change your net worth.
How to find it out
Calculating your net worth is simple but likely won’t be easy. To do it, you need to first know the total value of your assets.
Check the current market value of everything that you own (while looking at only the major items is a shortcut, including even the minor ones will give you the whole picture) and add them all together.
Then, combine the value of all your liabilities, including rent, and utility and credit card bills. For debt that has been split into several payment cycles such as loans, mortgages, and installments, use the remaining balance as the figure.
When you have both, subtract your combined liabilities from your total asset value. The result is your net worth.
Why you should know it
Knowing your net worth gives you an idea of how your finances are doing. You may find that you’ve accumulated a good number of assets without many liabilities, and so are managing your money well.
If so, you can give yourself a pat on the back, and maintain the healthy money habits which have gotten you that far.
However, you might discover that even if you have a lot of assets, your liabilities are still greater than them. If this is the case, you’ll need to reconsider how you handle your money, and try to find ways to change the situation for the better.
Remember also that even if your financial habits are already good, there will always be room for improvement, which will reflect on your net worth.
Don't forget that not all liabilities are bad. There are those that you deliberately take in order to create opportunities to acquire more income-generating assets.
That’s why it’s also equally important to look at the quality of liabilities you have, how you are using their proceeds, and if they are contributing to your assets in the long run.
How often you should check it
There’s no standard frequency at which you should calculate your net worth, although it’s recommended to do it at least when you experience a large change in either your assets, liabilities, or both.
Without such a change, you may choose to check every quarter or every 6 months. You can even do it more often if you prefer, although you may not see much difference each time.