Your net worth is the financial equivalent of looking in a mirror. When you look at your net worth you start to see where you’re doing well financially, and where you’re falling short. If you have the financial equivalent of a booger on your face, your net worth will show you that too.
Are you regularly calculating your net worth? Do you know how to calculate it? This article explains what net worth is, why it matters, and how to calculate it.
What is net worth?
Your net worth is the value of your assets (what you own) less the value of liabilities (debts) that you owe. An easy formula for net worth is:
Assets – Liabilities = Net Worth
The trick to calculating your net worth is understanding how to define assets and liabilities.
Simply put, assets are things you own that are worth money. Of course, assets include things like the value of your retirement accounts and your checking and savings accounts. But those aren’t the only assets you need to consider.
If you own property (such as a personal home or rental property), you’ll want to count those towards your net worth. Business owners should include a conservative estimate of the value of their business in their net worth. Assets can even include personal property such as vehicles, fine art, firearms collections, or rare coins.
Compared to your assets, liabilities tend to be more straightforward. These are any debts you owe including a mortgage, credit card debts, auto loans or other debts.
Why does net worth matter for retirement planning?
Retirement planning is an exercise in cash flow planning, but that doesn’t mean your net worth is unimportant. During your working years, it’s easy to focus on your income or your salary as the most important part of your financial life. However, if you plan to retire, you won’t earn a salary (or a full-time income) any longer. You will use your assets to generate income, and your debts will be a drain on that income.
A growing net worth shows that you’re on track for achieving your retirement lifestyle goals. Your net worth is a key indicator of your overall financial health, especially during your working years. That’s why the Retirement Budget Calculator now includes a net worth calculator for retirement.
How can you calculate net worth for retirement?
The net worth calculator for retirement makes it easy for you to calculate and track your net worth over time. The calculator breaks your assets into four major categories.
First add up your assets
The retirement budget calculator breaks your assets into four major categories which you can see below.
Liquid Investable Assets
These are assets that are easy to convert to cash. They include the following types of accounts:
- Savings accounts
- Checking accounts
- Money Market Accounts
- Retirement accounts (IRAs, Roth IRAs, 401(k)s, etc.)
- Brokerage accounts with stocks and bonds.
Real estate assets
Real estate assets include any properties that you own. It includes the following assets:
- Your personal residence.
- Rental properties.
- Commercial property that you own.
- Raw land.
- Share in a privately held real estate investment trust.
Personal property represents the value of things that you own and use on a regular basis. Technically, you could count the value of everything from your furniture to your old socks. However, most people just include the value of high value personal items that they could easily sell. These include:
- Musical instruments
- Hobby equipment (such as computers, stereos, tools, unused materials, etc.)
Other assets include assets you own that aren’t covered by other categories. These could include:
- Recreational vehicles
- Estimated value of a business (that you can sell)
The value of all four categories represents your total assets.
Next add up your liabilities
Once you’ve established the value of your assets, you need to account for all your liabilities. These can include any of the following:
- Balance on any mortgages (including rental real estate).
- Home equity loans or lines of credit.
- Credit card balances.
- Auto loans
- Required alimony payments
- Required child support payments
- Judgements against you
Finally, subtract your liabilities from your assets
Once you know the value of your assets, and the value of your liabilities, calculating your net worth is easy. Simply use this formula:
Assets- Liabilities= Net Worth
Need help calculating your net worth for retirement?
If you need help calculating or tracking your net worth, you can now use the net worth calculator in the Retirement Budget Calculator. As you build up your assets and pay down your debts, you’ll see your net worth climb.
Watch this short video below to see how the net worth calculator for retirement works in the retirement budget calculator.
[youtube id=”w0GWjgwQc5E” height=”353″ width=”574″ marginbottom=”15″]