What is your Net Worth?

I recently started an online 10 week personal finance course with Rebel Finance School 2022.

It’s been great so far; the first session was all about knowing what your current net worth is.

You may have come across this phrase if you’ve ever searched for any famous person online. 

For example: “Elon Musk” net worth: $218.1 billion or “Jeff Bezos” net worth: $132.8 billion.

So the question is: what is net worth, what does it mean, and how is it actually calculated?

In personal finance, your net worth is a common way to track your personal wealth.

It is based on a simple equation: the value of all your assets minus the value of all your liabilities.

In other words, it is the cash you would have in your pocket if you were to sell everything right now.

In this blog, I will talk about what is net worth and why is it important to know your net worth.

I’ll also talk about how to calculate it and explain the difference between assets and liabilities.

Finally, I will share a link where you can calculate your net worth and other useful resources.

Why Calculate your Net Worth?

Have you heard of the expression: “What gets measured gets improved”? 

I hadn’t heard of this phrase before the course, but when I think about it, it makes total sense!

An analogy to tracking your wealth is like tracking your health: weight, body fat, muscle mass. 

I track my health pretty much every day, so it makes sense to be able to track my wealth also.

By measuring your health you would know whether you are getting closer to your goal or not.

Without measuring, you wouldn’t know if you were getting better, staying the same or worse.

The same applies to your wealth: you need to be measuring your net worth on a regular basis.

Just by measuring, you are more conscious of your actions, and are more likely to improve it.

Think of your net worth as your body weight, assets as muscle mass, and liabilities as body fat.

To improve weight (net worth), you must increase muscle (assets), and decrease fat (liabilities).

How to Calculate your Net Worth?

As mentioned above, the common definition of net worth is your assets minus your liabilities.

However, if you don’t know what assets and liabilities are, it really doesn’t mean anything!

The way to calculate your net worth is by first of all adding up all of the assets you may have.

For example: properties you own, your pensions & investment accounts, cash & savings, etc.

Once you do that, you then move on to adding up all of the liabilities that you may have.

For example: your mortgage, any loans you have e.g. student loans, any credit card debt, etc.

Once you have added all of those up, you subtract the subtotals, and calculate the difference.

What you have left is your net worth: what you would have left if you were to sell everything.

The idea is to calculate your net worth regularly, ideally every month, and evaluate the result:

Is your net worth increasing every month? Is it decreasing each month? Is it staying the same?

What are your Assets?

There are many thoughts on what an ‘asset’ is. Some say an asset is anything that you own.

If we take Rich Dad Poor Dad’s definition: An asset is anything that puts money in your pocket.

Therefore, if we use this definition, then the assets you should include are:

• Bank accounts: money in your current and savings accounts, foreign currency accounts, etc.
• Business accounts: money in your business accounts (if you have some sort of business).
• Pensions: money in your pensions (as well as your partner’s pension if you are a couple).
• Investment accounts: your Individual Savings Accounts (ISAs), Cash ISAs, Lifetime ISAs, etc.
• Properties: the current valuation of the properties that you own.

Technically, your home is not an asset unless you are renting it out and generating an income.

However, because a house tends to increase in value over time, its ok to include it as an asset.

What are your Liabilities?

As for liabilities, the general definition tends to be universal: any and all debts that you owe.

Taking Rich Dad Poor Dad’s definition: A liability is anything that takes money out your pocket.

Therefore using these definitions, the liabilities that you should include are:

• Credit card debt: if you pay it off monthly then its fine, but if not, then include this in.
• Loans: these could be personal loans from a bank, student loans from universities, etc.
• Car loans: these include Hire Purchase agreements (HP), Personal Contract Plans (PCP), etc. 
• Mortgage(s): this includes your primary residence and any other properties that you own.
• Appliances/Electronics: this would include anything you are paying back on a monthly plan.

As you can see, it’s very easy to build up liabilities if you’re not measuring and keeping track.

However, there is such a thing as good debt and bad debt, but that is a topic for another blog!

What Not to Include?

We talked about what to include in your net worth; what about the things not to include? 

Let’s start with cars. According to Rebel Finance School, cars aren’t included in your net worth.

They say that cars are a liability because they depreciate in value and cost money to maintain.

However, accountants will tell you that your call is an asset: you can sell it and get some cash.

Even if you sold your car, which would be worth less, you would probably buy another one.

Therefore, cars are not included as an asset as they believe it falsely inflates your net worth.

What about tech, furniture, appliances, and jewellery: do you include them in your net worth?

Nope: according to Rebel Finance School, you shouldn’t include anything in your house either.

Accountants will argue with you again: “these are all assets, you can sell them for some cash.”

That may be true but they also depreciate in value and they are not making you any wealthier.

Your Net Worth Tracker

Now that you understand what net worth is, it’s time to calculate it for yourself.

Check out this free template by Rebel Business School which you can access using this link.

It’s real simple: just download the excel spreadsheet, fill in all your assets and your liabilities.

Once you’ve done that, on the bottom of the spreadsheet, it tells you what your net worth is.

Simply keep updating it every month, and you are on your way to building true wealth!

If you want to want to learn more on assets and liabilities, then check out Rich Dad Poor Dad. 

This book will fundamentally change the way you think about money and personal finance!

Do you have another way of measuring your net worth? Please share in the comments below! 

If you’ve enjoyed reading, check out my other blog: What is the best Business Legal Structure?

Also, if you have any suggestions for future blog topics, please share in the comments below!