Estimated reading time: 4 minutes
Learn how to calculate your net worth and gain insight into your financial health.
Understand the significance of assets and liabilities in determining your overall wealth.
Today, I’m going to share with you the basics of calculating your net worth without any fancy finance jargon.
Understanding Net Worth
What is net worth?
A straightforward definition for net worth is that it is a simple calculation where you add up all the things you OWN, which is also called an “Asset,” and minus the total of everything you still owe, also known as a “Liability.”
Net Worth = Assets – Liabilities
Net Worth Determination
How to determine net worth
Items like your house value and the current value of cars if sold today, but remember, cars depreciate over time, meaning they will always be worth less.
Any investments you have, such as TFSAs, RRSPs, non-registered investments, stocks, bonds, work or private pensions, and cash in the bank, are all assets.
Assets can be liquid cash or less liquid items such as bricks and mortar (house); less liquid items would have to be sold to generate some money.
Liability
What is liability?
Then, add all the things you still owe money on, like your mortgage, car loan, line of credit, etc.
All these are called Liabilities, which means you are still liable for them.
In other words, they still need to be paid whether you have a job.
After working out my Net Worth, what will it do for me?
Calculating your net worth will give you a general idea of your financial well-being.
Negative Equity
What is negative equity?
If you own more than your OWN, it shows you are in “Negative equity.”
Generally, negative equity is not desirable because if you had to sell everything tomorrow and live in a cardboard box, you’d still owe money to someone or another.
For instance…
You’ve racked up $20,000 in debt and decided to do a consolidation loan where the debt is added to the mortgage.
The original mortgage was $190,000, and the house is worth $200,000.
Now, you’re in a state of negative equity on the house.
If you get into dire straits and sell the house to clear more debt, you’ll still be $5,000 short.
It will cost you 5% or $10,000 to sell it (real estate agent) and the lawyer’s fees.
Now, selling the house still leaves you at least $15,000 in debt.
So, what else do you want to sell?
Spending More Or Less Than You Earn
Tallying up a statement of net worth regularly can also indicate if you’re spending more than you earn, as your negative equity will increase.
Think of your finances as a business; you don’t want to operate at a loss; you want to profit.
For the most part, most people’s net worth should increase over time due to paying down the mortgage and the increase in property value.
Our finances may be different if we had better cars or maybe if we had a bigger house, but that wasn’t our goal to have more than we could afford.
Living below your means is one key budgeting strategy and how we saved enough to become mortgage-free in 2013.
Understanding personal net worth is worth the time you spend investing in your future.
Discussion: Have you ever calculated your net worth before?
Please leave your comments below.
Thanks for reading,
Mr. CBB
P.S.- You can catch up on our monthly Net Worth updates on the blog if you missed them.
Interesting! I had no idea of the importance of net worth!
Well I’m glad you learned something new today Jen, although I gather the past 2 weeks have been educational for us both. Thanks for the comment Jen! Mr.CBB
One thing to point out, if you consolidated the debt into your mortgage, you were already in a negative net worth position. I find some clients don’t count unsecured debt as a liability the same way as a mortgage debt…in the end if you owe it, it is all debt. The key is focusing on how to pay the debt off the fastest and cheapest way!
I love the budgets you have provided. I can get started right away. However, with the budget that is changeable, how do I create all the extras that you have on your budget page? I don’t know anything about linking one cell to another. Can you help or give me direction on where I could get help? Thanks and I love this site!
I don’t normally do this but if you email me the list of categories of what you want in there I will do it for you. 🙂