One of the first areas to look at when learning to manage your money is your personal net worth.
This simple calculation will give you an idea of whether or not you are moving in the right direction.
Think of it as a financial feedback mechanism.
I would go so far as to say that this is the single most important piece of information you will need to know.
If you just learn what this is and how to calculate it, you will be further ahead than most of the population.
Let’s look at how to calculate your personal net worth, as well as how you can get your free personal net worth calculator.
Personal Net worth = Assets – Liabilities
So, to put it simply, your net worth is the value of you.
What you own (assets), minus what you owe (liabilities), will give you a value, hopefully positive.
Now don’t be mistaken, this is not the value of you as a person.
You are so much more than just your net worth.
This is just the financial value of your estate if you were to die today.
You can calculate this on your own, or you can use any one of the free net worth calculators out there today.
I will provide a link to a free personal net worth calculator.
Personal net worth calculators are all pretty much the same.
You plug in your numbers and it will automatically calculate your net worth for you.The tricky part is defining what an asset and liability really are.
An asset as defined by dictionary.com is: “items of ownership convertible to cash.”
A liability as defined by dictionary.com is: “moneys owed; debts or pecuniary obligations.” A bank will calculate your net worth based on these two definitions.
This would normally be fine, however, I don’t believe that definition of an asset to be entirely accurate.
How can you call a house an asset when it is taking cash out of your pocket every month?
Thousands of dollars of negative cash flow every month for 25 years is not my idea of an asset.
I would actually call it a potential asset, because you could make money upon sale, potentially.
By this definition, you could by an expensive boat that costs you $1000 a month and still calls it an asset.
Just because you have the potential to sell something in the future does not mean it is an asset.
This is how the wealthy define an asset and liability:
Asset – anything that puts money directly into your pocket
Liability – anything that takes money directly out of your pocket
A house does not put money into your pocket until you sell it.
That is why it is defined as a liability until the date of sale.
If you buy a business or invest in rental properties, you can call those assets because they generate income.
The main point about calculating your personal net worth is to be consistent.
Whichever way you would like to define an asset is up to you.
Just make sure to use the same definition each time.
I update my net worth calculations monthly to make sure I am on the right track.
I recommend at least every quarter.
If your net worth is going up, it is a good indication that you are on the right track.
Remember to review, make changes, and monitor.
Get your free personal net worth calculator, and punch in your numbers.
If you consistently monitor your personal net worth and make improvements, I promise that you will be light years ahead of most people in no time.