How to Calculate Net Worth

Calculating ones net worth might sound easy at first but once you get into the details, it quickly becomes a tedious task. In theory, it is simple. Net worth equals your assets minus your liabilities. But if your personal finances are a little complicated, you soon run into several obstacles. So lets start with assets.

Assets

Assets are everything of significant value that you own. Think especially about a house or other real estate properties, your car, expensive furniture, etc. Add also all investment assets such as stocks, bonds, 401k, and also collectibles. If you are a successful entrepreneur, your own business might be the single biggest asset you own. How much is your business worth? Lets not mistake a net worth of the business (again, it’s assets minus it’s liabilities) with how much value it adds to your personal net worth which is for how much you would be able to sell it. In that case, most entrepreneurs utilize so called multiplier, meaning for how many times your business’ net gain you can sell the company. The average multiplier for small businesses under 1 million dollars is between 2.3 and 2.7 but this number varies greatly based on industry.

How much is your house worth? Look at the comps in the area you live in. Use the similar approach for establishing the value of your car. There are plenty of website that calculate it for you based on model, year, miles and so on. Investment portfolio is usually quoted daily on market exchanges. The tricky part are collectibles. And here comes the bad news. They are more often than not worth much less than the owner thinks. Most areas of collecting go out of style with each new generation and while for example baseball cards were once hip, they are often sold by weight nowadays.

Liabilities

Everything you owe. Mortgage on your house, loan on your vehicle, your credit card debt and so on. Do not forget tuition you might be still paying off. Once you deduct all of this from the value of your assets, you might end up in red numbers with negative net worth. You wouldn’t be the only one. Especially if your mortgage is so called “underwater” after the property values in your area sank. But do not worry. It is never too late to start building personal wealth. Just plan your purchases, big and small, and start paying off your debts.

Disclaimer: Author isn’t certified accountant and/or investor and information in this article should not be taken as a legal advice. The material on this website are provided for information purpose only.