6 Reasons Your Net Worth is Important and How To Calculate It

Last updated Mar 01, 2022 | By Robert Wilson
6 Reasons Your Net Worth is Important and How To Calculate It image

If you want to know how to increase your wealth, you need to know the importance of calculating your net worth. Personal wealth is often measured in many ways, but to get the clearest view of your financial situation there is no measure as accurate as net worth. Wealth isn’t just about salaries or assets – your liabilities play a big part too. To find out your net worth, keep reading.

What is Net Worth?

Simply put, net worth is the difference between your assets and your liabilities. If you put it into a mathematical equation it would look like this:

Assets – Liabilities = Net Worth

For example, if you hold $300,000 in total assets and $125,000 in total liabilities, your net worth would be $175,000.

6 Reasons Why Net Worth is Important

Net Worth is the Most Accurate Measure of Wealth: Wealth is what you have left after your bills and rent/mortgage is paid. You can’t calculate your wealth without knowing your net worth.

Tracks Your Financial Progress: Net worth is a single number, so you are able to track it, and compare it from year to year. If your net worth is growing it means you are becoming wealthier.

Focuses on More Than Just Income: Some think wealth is focused on their yearly salary. But, even if you get a pay raise it doesn’t mean that your net worth will rise. Your net worth is an overview of all your finances, not just your income.

Avoids Over-Emphasis on Asset Value: Others use the value of their assets to measure their personal wealth. But assets can easily be offset by large debts, and often those who focus on assets aren’t as wealthy as they think they are.

Puts Your Debt-Level in Proper Perspective: Your net worth will allow you to see a clear picture of the value of your assets and your income compared to any debts you owe. This is a way to measure if your debts are really as bad as they feel. For example, if you have $50,000 in debt — and $250,000 in assets your debt levels aren’t so extreme.

Important When Applying for a Loan: Some lenders will want to know your net worth before approving a loan in your name. So, from this perspective, it’s just as important as your credit rating.

How to Calculate Your Net-Worth

It’s easy to calculate your net worth. You just need to find out the value of your assets and liabilities first. Then it’s as simple as subtracting your total liabilities from your total assets.

Your list of assets should include liquid assets, retirements investments, real estate, business assets or equity, personal assets, personal loans receivable, and any other assets you might have.

Your list of liabilities should include mortgages, installment loans (car payments), student loans, credit cards, business loans, personal loans, and any other liabilities.

How to Improve Your Net Worth

At first, calculating your net worth can be a bit intimidating – especially if your score falls into minus numbers. However, this number can always be changed or grown. It’s best to know your net worth so you can use it as a starting point to grow your wealth.

There are two main ways to improve your net worth:

  • Paying off your debts and/or
  • Increasing your assets

It’s advisable to pay back your debts if your net worth is below zero, this will put you in a better financial position so that you can improve your net worth in the future.