Whenever you hear personal finance the term net worth probably comes to mind. Net worth can be thought of as the overall status of your financial health. Calculating your net worth is a relatively simple format: subtract your liabilities from your assets.
Assets - Liabilities = Net Worth
Assets
Start with adding up your assets. This includes the total amount of money you have in cash, inside of a bank or investment account, retirement savings, businesses, etc. Add the total figure and this represents your financial assets.
When it comes to consumer items, such as your car, furniture, clothes, and other personal products, do not include these in your net worth. Some personal finance influencers urge people to include these items because you own them, but they do not represent a dollar figure for your assets unless they're sold. Selling your vehicle(s) and most of your clothes will obviously increase your total amount of money in assets, but that's not at all a practical measure.
There is an ongoing debate in the financial community whether to include your personal residence as part of your net worth. Personally, I do not recommend including your personal residence when determining your net worth, unless you plan on selling it in the near future for a profit.
Liabilities
Now do the same thing and add up your liabilities. These are know as your debts because you are liable for paying back the money borrowed (and most likely with interest). This includes credit card debt, car loans, student loans, etc.
This is probably going to be a depressing process when adding up your debts, but the first step in making any positive change is to face reality and understand your current financial position.
Results
Calculate the final results. For example, if you have $25,000 in assets and $40,000 in liabilities, then your net worth is -$15,000. This means you have a negative net worth. The reverse of that example results in a positive net worth of $15,000.
Regardless of how good or bad the final figure is, do not get comfortable and have a financial plan moving forward. Do you have more money in assets than debt? Great. Take the initiative and tackle the remainder of your debt in the best and quickest way possible. Does that liability figure seem overwhelming and overshadow your total assets? Great. Now you know exactly how much total debt you have and hopefully use this exercise to make positive changes, such as increasing income, having a budget, tracking you expenses, and making aggressive payments until you have no more liabilities.
Lastly, above all else mentioned in this post, please understand this point: Every $1 paid towards a liability is a $1 increase to your net worth. Read that last sentence again if needed and really wrap your mind around this mentality. Money spent towards debt increases your net worth because you are lowering that liability by the same amount. Start making progress, or keep making progress, until you reach your financial goals. Good luck.
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