Your personal net worth is used to measure your current monetary health and this indicates whether you have the means to achieve major financial goals such as buying a home, sufficient savings to retire, withstand unexpected expenses, prolonged loss of employment or income etc. To calculate your net worth, simply take your total financial assets minus financial liabilities.
We like to emphasize that having a low financial net worth in no way undermine your worth as person. This is not the way to compare two individual, and we have seen many rich yet unhappy people around.
What are financial assets?
In short, a financial asset is money or an investment that can be converted into cash. These include the money you have saved up in bank accounts, as well as investment products you have bought such as stocks, bonds, and mutual funds. Money invested through retirement accounts, shares in any businesses you have invested in, property you own are also financial assets.
Many people include the value of their home when calculating their total financial asset. However, this should be excluded because you still need a place to live in and cannot simply sell it off. If you decide to sell it and tap into the home equity you have built up over the years, note that you need to factor in costs for accommodation and rental.
Assets should also include any future expected Social Security benefits or pension payments you are entitled to. Unlike your own personal assets, these Social Security benefits will be quoted in dollars per month.
Your valuable personal possessions such as watches, gold, jewelry, cars etc can also count as your assets. However, do note that many of these are depreciating assets meaning they do not fetch as high as their buying prices as time passes.
What are financial liabilities?
Personal liabilities include any outstanding loans and debts, such as your student loans, home mortgage, car loan, credit card balances, personal borrowings from friends and family etc. To calculate your financial net worth, simply subtract these financial liabilities from your assets.