Net worth is the simplest and most useful measure of your financial health. It’s a single number that reflects exactly where you stand. Over time, it tells you if you’re improving your finances, or setting yourself up for failure.
But how do you calculate net worth?
What is Net Worth?
Your net worth is the “net” balance of your assets and debt. It’s how much money you have (or owe) when you add everything up.
A positive net worth means you have more financial assets than debt. A negative net worth means you have more debts than financial assets.
The simplest way to understand net worth is the following equation:
Net Worth = Assets – Liabilities
When you take everything you have and subtract everything you owe, you’re left with your net worth. However, you should declare assets and liabilities within reason.
Below are some guidelines when it comes to determining what you will count as an asset or liability. Use these when filling out the spreadsheet with your own accounts and numbers so you can get an accurate picture of your net worth.
Calculating your Assets
The first step to determining your net worth is to calculate your financial assets.
Your assets are not everything you’ve ever bought. Items like clothing or home decor might have been expensive when you made the purchase (maybe you even called it an “investment piece”) but these generally don’t count as assets. Likewise, you might have a really big cellphone bill this month, but because you’ll be paying it off within a month, it’s not really a liability.
Here are your real financial assets:
- Savings accounts
- Work pension or retirement plan
- Real Estate
- A personal or incorporated business
For the most part, your assets are any financial resources you have. These can be different types of investments in varying degrees of liquidity. Generally anything you can sell for a significant amount of money is a financial asset.
When you list out your assets, you might end up with something that looks like this:
What is your liquid net worth?
Your liquid net worth is all your assets that are already in cash or can be quickly converted to cash. This includes money in savings accounts and unregistered investment accounts.
It doesn’t include illiquid assets, like your home, vehicle, or work pension. Even though all those things definitely factor into calculating your net worth, they’re not liquid. So don’t count them as part of your liquid net worth!
Ignore your Vanity Assets
Vanity assets are typically things people count on their balance sheet to boost their net worth so they feel better about it, but these items are typically illiquid, depreciating, and over-estimated in value. Some vanity assets you might be counting when calculating your net worth include:
- Designer bags or clothing
- Chequing account
- Emergency fund
Most of the above are worthy of assigning value to when you’re shopping for insurance, but if you’re trying to determine your net worth to assess your financial health, I would encourage you to leave them out.
Your vehicle is a depreciating and semi-illiquid asset. Even if you’re certain about the value you could for your car, it would take time and effort to sell it. And maybe in a pinch, you wouldn’t be able to, because you need it to get to and from your job.
If you insist on keeping your vehicle as an asset on your net worth balance sheet, underestimate its value by a few thousand dollars to account for your own bias about its value, and the hassle of liquidating it should you need to.
People also tend to over-estimate the value of their possessions, like jewelry and electronics, only to find when it comes to sell these items, there’s no buyers to be had. Many people include their chequing account in their net worth calculations, but because this typically holds your planned spending, it shouldn’t be counted as part of your net worth.
Lastly, your Emergency Fund might be a decent savings account for you, but because it’s essentially earmarked for catastrophe, it’s more accurate to file it as a sort of planned spending in your mind rather than part of your long-term financial assets.
DON’T count vanity assets when determining your net worth. You’re doing yourself a disservice. As a rule of thumb, I do not count items with an individual value of less than $2,500 as an asset.
This stops me from being ridiculous and counting things like my TV or Macbook as financial asset, even though technically I could hawk these for cash if I needed. It’s best to be pleasantly surprised if you ever need to liquidate your possessions, instead of always thinking in the back of your mind you can just sell random things to make rent.
Determining your Liabilities
Once you know your assets, you want to calculate the other side of your balance sheet: your liabilities. Your liabilities are any financial obligations or debts you have.
- Credit card debt
- Medical debt
- Lines of credit
- Student loans
- Personal loans
- Vehicle loans
- Investment loans
- Unpaid bills and fines
When you list out your liabilities, you might end up with something that looks like this:
Like with your assets, you might find it preferable to only count debts owing in excess of a certain amount as a liability. I personally do not count anything less than $500 as a liability, since I can typically pay off any amount smaller than that with one paycheque.
How to calculate your net worth
Finally, once you know your assets, you simply subtract them from your liabilities to get your net worth:
Remember, your net worth is a “big picture” financial assessment of where you stand. Worry about your expenses and small dollar amounts in your day-to-day spending, and save your long term savings and debts for your net worth.
You don’t need to and shouldn’t calculate your net worth on a daily basis!
Keep track of your net worth on a monthly, quarterly, or annual basis instead. Using longer timelines will give you a more accurate picture of how you’re doing with your finances.
How to maximize your net worth
Your goal is to grow your net worth year over year by continuously reducing your liabilities and increasing your assets.
Ideally, you want it to always go up, but there may be years in your lifetime where your net worth goes down for whatever reason: you go back to school, start a business, have to take a leave from work, or the stock market grossly underperforms, and so on. It’s ok to have some down years so long as the general trend over 5-10 year timeframes is always up!
I’m wishing you nothing but debt-freedom and riches. Good luck!
Helpful post, Bridget! I’ve had several people tell me I need to stop including my car in my net worth calculation. Your reasoning makes a lot of sense! To be honest, I don’t think I own any additional vanity assets (other than maybe my laptop and DSLR camera), but I’ve never considered including those.
Thanks Kate =) Glad you enjoyed it!
My husband & I included our car in our net worth calculations until we hit $100,000. It was totally a vanity asset for us, but once we hit that, we took it off (and I was so done checking the price of similar used cars for sale every month!!)
Where would a whole life policy fit into calculations of Net worth. I’m thinking asset if it has cash value?
I’ve always included the chequing account in the net worth. I understand what you are saying about planning spending though but would this in theory extend to other larger planned spending? Like saving up for a new car or a down payment? In theory you could have quite a bit of money saved up. And until you spend it could be used for other things if needed. What are your thoughts on including them in net worth as well?
That’s why I leave anything <$2,500 off my asset side of the balance sheet. If it was something for a car, I would leave it off just because I also don't count cars as an asset! If it were for a house downpayment, I would leave it on, because you will likely retain the value as equity in the home. Ultimately it's entirely up to you what you want to include or leave out. As long as you're being honest with yourself about the utility of the asset you're set!
I agree with Sarah: taken to the extreme, all saving is for planned spending, at some point… My RRSP is earmarked for spending when I retire, but I still count it as an asset when calculating net worth. Bridget, I agree with your idea of setting a dollar cap for non-financial assets. However, I would count any cash as an asset, just like I would count anything you owe as a liability, no matter how small.
I used to count my car, but I stopped including it a couple years ago when I decided that its value was really not all that much anymore. These days, with nearly 300K kms on it, it is quite literally worth nothing financially, even though it’s worth a lot to me and still runs great! If I were to replace it with a new/new-ish car, I would probably include it somehow in my net worth, following your guidelines. Just because if I spend $20K on a car, my net worth isn’t really going down $20K, but maybe only going down $5K at that moment.
I have never counted my defined benefit pension in my net worth calcs however… how would you suggest counting that? Maybe use the value from the once-a-year statement I receive?
As far as chequing accounts, I use my VISA for all expenses, and I like my net worth to be a snapshot in time, so I will usually subtract what I currently owe on VISA from my chequing balance and then include the rest. I also include my e-fund, contrary to what you’ve mentioned here. Although I do agree with your logic, it could be gone tomorrow. But since it’s just cash sitting there, I’ve always included it.
Keep up the great work!
These posts give me something to think about and strive towards. I’m not going to lie though: the older I get and the more it’s clear that I’m not going to be in the green for a few more years, the more and more anxious I get. 9.5 years of school for what!!!
On the other hand, Bridget’s posts are always a great reality check that we are not permanently bound by past financial mistakes (or for checking out from financial realities while in school) and with discipline and hard work, we can forge a better, more stable path (or at least that`s what I`m telling myself right now…)
Great post. Do you consider someone with a net worth of $1 million a millionaire or do you think the better measurement is investable assets of $1 million? I tend to lean toward the latter – if we include our homes, many Canadians could call themselves millionaires.