What is net worth and how do you calculate it?

The importance of knowing your (net) worth

While life, and wealth, can change in an instant, knowing where you are today helps you plan and set goals for increasing or maintaining your net worth. Know what investment opportunities to take or ignore, what debts to focus on paying, or when to make certain decisions. Knowing your net worth can be valuable in planning your retirement, your current investments towards retirement, and your estate for future heirs. Simply put, net worth matters because you matter.

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Making the net worth calculations

To figure out your total net worth, work with two categories—your assets, or what you own; and your liabilities, or what you owe. Your net worth will be your assets minus your liabilities.

Assets are often tangible, but they also refer to intangible properties you prove ownership of. Examples include property, cash, cars, stocks, businesses, and retirement and investment plans. Liabilities refer to situations where you owe money or are obligated to repay a debt—think taxes, credit cards, medical debt, mortgages, vehicle loans, child support, or alimony.

The math from this point on can be as simple as addition and subtraction, but for assets and liabilities that currently don’t have a dollar amount assigned to them, you need to calculate the fair market value of each. For something like a car or home, look up items of comparable value and work from there. For market-dependent assets, check the stock price in real time, and accept that the value is likely subject to change as time goes on—hopefully for the better.

What if you do all these calculations and discover your net worth is negative? Don’t panic—perhaps that’s knowledge you didn’t have before. And remember, you still likely have assets like your home and car you’re currently enjoying and getting value from now, which means you might not have to worry about acquiring those in the future. Now you can make a plan to balance the books and figure out what debts, like credit card debt, to tackle first to increase the assets and decrease the liabilities.

While you can compare the values of the assets and liabilities to each other for your overall true net worth, think of them as distinct categories to be improved on their own merit. You can sell an asset to pay down a liability, yes, but there’s also other ways to acquire assets or reduce what you owe, so simply knowing the amounts and obligations in each category can be an asset of its own.

The business of net worth in business

Personal net worth can be a lot easier to calculate than a business’s net worth, since a business’s value depends on several different market conditions and assets. To calculate this net worth, either figure out how much comparable businesses might cost if you were to buy one upfront or need to replace it entirely or figure out the value of future cash flow and work backward to the present. Business assets can be part of individual net worth but trying to value a whole business might require accountants to confirm or double-check your individual work.

Discovering your net worth is a simple process and worth spending time on, since it will likely pay off in the long run. Your future self, or heirs, will be able to reflect on the investment you made towards financial knowledge and security and hopefully say a thank you as big as their bank accounts.