I think for many people the whole term “net worth” is something you associate with rich people. You go to Google and search for “Name Surname” + “net worth” and you expect to have a glimpse into lives of these actors, rich CEOs and other celebrities.
But why regular people might benefit from calculating their net worth?
1. To check if you have healthy amount of debt, useful when figuring out "how much house can you afford" etc.
2. This information is required for certain types of investments and if you want to buy a franchise.
3. If you want to invest X% of your net worth in risky ventures.
4. It might uncover some unpleasant truth about the resale value of your car.
5. To stroke your ego and/or feel something, even if this something is a feeling of doom and depression.
How do you calculate your net worth?
In theory, it sounds super simple. Add up all your assets, then deduct liabilities.
Trying to figure out the exact worth of some assets.
For example, how do you value the portion of the business that you co-own with another person? Or what’s the real value of your 4-year old car? What about your house or apartment?
In many cases, asset valuations will be judgement calls. It’s probably a good idea to be conservative in these cases.
Things to include in your net worth calculations
At its essence, net worth is just assets minus liabilities. But there are nuances, like these:
Do you include pension in your net worth?
Some people might say: “No, pensions are income, not asset.” While others would say that pension can be passed to your beneficiaries when you die, so you need to count it.
Do you factor in taxes?
No, but always a good idea to keep in mind.
Is it worth it to add up all the furniture and clothes?
Do you deduct selling costs?
Do you include student loans as liability?
From one side, it’s a liability and a recurring expense. But also, if you’re dead tomorrow - in most countries / states your beneficiaries won’t need to pay out your student loan.
What if you’re married, how do you calculate joined assets, like a house?
Simply put, once you marry and combine finances, there is no longer “your net worth” and “her net worth”. There is “household net worth”.
“Honey, we’re millionaires!” sounds even better than “Honey, I’m a millionaire!” to me.
If you end up getting divorced, consider that 50% asset loss as tax for being stupid.
What about stock / options in a startup?
You can value it when you go public or sell. You will only fool yourself if you count it in your net worth.
You may posses many things of value, that are not part of your net worth. Things like your job, your education, your razor sharp wit - these all have value, but are not part of your net worth.
Now really, how do you calculate your net worth?
Finally, there’s this calculator that I’ve used. It’s very simple, but effective.