Have you ever calculated your net worth? Do you know how to? It is not too hard if you have your paperwork together and know the value of your things (e.g. home). Your assets minus your debt = your net worth.
So if you sold off what you own for it’s current value such as your house, car, cashed in savings and superannuation etc and paid off your debt, this is what you would be left with. I do not include all my jewellery, furniture and things in this exercise.
To calculate your net worth you will need to list your assets first e.g.
House value $350,000
Investment property value $450,000
Then add all these together $945,000
Then make a list of your debts
Mortgage on own home $270,000
Car loan $13,000
Investment property loan $365,000
Then add those together $648,000
Next subtract your debts from your assets and you will be left with your net worth, in the above example that is $297,000.
If you have read The Millionaire Next Door (which is an amazing book by the way and if you wanted there is a reading group for it on Simple Savings), you will have read that to calculate what you net worth should be you use the following formula:
Your age x your realized pretax income then divide that number by 10. The number you are left with is what your net worth should be.
There are variations to this formula according to different sources for example if you are young and just finished school you will more than likely have debt and not have any assets yet so you can change the formula.
Some suggestions I have read are if you are a student subtract 27 from your age as it is assumed you would not have worked, then you went to university so have not built up your net worth.
Another suggestion from The Simple Dollar was use your average wage for the last 10 years instead of just your current income. This works well especially if you haven’t been in the workforce long.
Basically how you calculate it is up to you. The above are just suggestions. The idea behind calculating your net worth is that you can evaluate it each year (use the same formula, whichever one you choose) then you can see how you are traveling financially.
You might also like: