In anticipation of Financial Literacy Month, we're developing a money management series to help you cut expenses, save dough and improve your overall financial security.
Speaking of financial security, do you know where you stand? Calculating your net worth provides you with an overview of your financial situation. It's all of what you own minus what you owe. Let's take a closer look.
How to calculate your net worth
To figure out your net worth, you need to keep track of all your assets (what you own) and your liabilities (any outstanding debts you have in your name). Assets include:
- The money in your bank account.
- The value of your investment accounts such as 401(k), certificates of deposits and mutual funds.
- Personal property (jewelry, art and furniture).
- Your vehicle (assuming you're not still paying off a loan).
When it comes to your liabilities, list your debts. How much do you owe on your credit card? Do you have a car loan? Student loans? List everything you owe.
Once you have an overview of all your assets and liabilities, subtract the latter from the former. If you have more assets than liabilities, you should have a positive net worth. If the value of what you owe exceeds the value of what you own, then you'll have a negative net worth.
If you have a negative net worth, don't panic - especially if you're young. The College Investor calculated the average net worth of millennials by age, and found the typical 30-year-old has a net worth of a little more than $2,000. However, most individuals in their 20s have negative net worths. This is because most are still paying off student debts and working in entry-level positions.
The advantages of calculating your net worth
Why should you even bother calculating your net worth? Think of this figure as a strategic asset. Suppose you have a negative net worth. You notice that your car payment is the one outstanding debt that's preventing you from getting "in the black" as the financial analysts say. What you can do is make principal payments on that loan every couple of months whenever you have extra cash available.
In the process of calculating your net worth, you may take a closer look at your monthly bank statement. Note how much you spend on day-to-day expenses - do usually buy lunch? Get a $5 cup of coffee in the morning? If you spend about $15 a day on expenses such as these during the work week, that's $300 a month you could be saving - $3,600 a year!
Another advantage of knowing your net worth is that it may encourage you to kick it into high gear, career-wise. You might consider getting a couple of certifications to boost your qualifications or spend a couple of extra hours on the job. Your employer will recognize these commitments and reward you over the long term.
Again, if you have a negative net worth, don't panic. You're more than capable of bouncing back!