The first basic step to understanding and controlling your personal finances is to calculate your net worth.
Net worth is simply the value of everything you own minus all of your debts. It is like a picture or snapshot of where all of your money is. It’s a simple exercise and it doesn’t take long to calculate.
Disclaimer: I am not a financial planner or expert. All information in the post is based on my research, opinion and experiences. Any action you take based on the recommendations from this blog is at your discretion.
Affiliate Disclosure: This post contains an “affiliate link”. This means if you click on an affiliate link and purchase a product/ service, I may receive a small commission at no extra cost to you. However, I only recommend products I personally use, love, and/or believe will add value to my readers. For more information see my disclosures.
Why you need to calculate your net worth
Help you set goals
Calculate your net worth to see where your money stands today. How can you improve your net worth in one year? From your net worth, you can make goals to improve your finances.
Examples of financial goals:
- Decreasing debt load – making a plan to pay off your debt
- Increasing the value of investments
- Increase your income
- Working towards financial freedom/independence
- Be able to take your family on a yearly vacation without going into debt
- Pay for a home renovation
- Build up a down payment for a new home
- Pay for your kids’ education
- Save up money for retirement
Calculating your net worth is an important step before creating a budget
Before creating a budget it is helpful to know where all of your money is allocated. How much money do you owe? How much do you already have saved up? By understanding where all of your money is, you will have a better idea on how you need to allocate your money in the different budget categories. You can determine what your priorities are such as paying off debt, should you be saving money for retirement or for a new home etc.
Related article: Budgeting 101
Understanding your family/partner finances as a whole
When you combine your money with another person, it is essential to calculate your net worth together. Understand where all of your money is as a couple/family. Working on your finances as a team is more efficient and effective than doing it alone. You can give each other accountability, support and there are no money surprises.
How to calculate your net worth
Open up a spreadsheet. Go through all of your bank accounts and make a list of all the money you have in one column. (Review chequing, savings, investment accounts etc.)
In another column list all of the debts that you have. This column is called your “liabilities”.
You basically add up all of your assets and add up all of your liabilities. Then the total assets minus total liabilities will equal your net worth.
If you are unfamiliar with how to use a spreadsheet refer to this spreadsheet article. This article shows you how to use basic functions/formulas that you can apply to create your own net worth spreadsheet. Alternatively, you can use an online net worth calculator. Just keep in mind to use the same method each time you review your finances.
Assets – Liabilities = Net Worth
Calculate your net worth at least once a year. I chose not to include the value of my home or cars (as it is difficult to obtain the appropriate value of it each year). Whatever you choose to include in your calculations – keep it consistent when tracking. Your actual net worth number is not all that important. It’s whether or not the total value of your net worth increases over time.
Take the time to calculate your net worth. Use your net worth to come up with financial goals and a plan to increase it over time. By understanding what your current financial situation is today, it will help you figure out where you want your money to go in the future. Make your money more efficient and effective – make it work for you!
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