How do you calculate your Net Worth? What does it mean? These are all questions we should be able to answer.
Net Worth is as simple as the equation: Assets – Liabilities = Net Worth
For many Net Worth is an expression of vanity, to others it is a symbol of progress. Personally, Net Worth to me provides a report card that I can track annually, and by summarizing my Net Worth in a Balance Sheet type manner also can help give a qualitative understanding.
| Monthly Income | Monthly Liabilities |
| Active Income | Budget Expenses |
| Passive Income | |
| Personal Assets | Personal Liabilities |
| Savings | Outstanding Debt |
| Investments | |
| Property | |
|
Net Worth |
As you can see in the above “personal balance sheet,” I separate out current from long-term assets and liabilities. Where this differs from a corporate balance sheet is that instead of “Current” assets or liabilities, which would be within a 12-month period, I substituted it for monthly.
My reasoning for this is that it makes it much easier to perform in a quick manner. Could you do an entire year? Sure, but this exercise is to give a quick and reliable indicator of your personal financial management. The easier to perform, the more likely you are to continue doing it.
Let’s dive into each category required to calculate Net Worth?
Personal Assets
Assets can include anything that you may purchase, gain, make or have. Really anything of value can be an asset. For Net Worth purposes, I would classify an asset as something that has value and that you are or would be willing to part with. In terms of value, something that has a “liquid market” is preferred. For my assets, I do not include my couch, my socks, or many other possessions.
Things I include are savings, investments, rentals, cars, houses, etc. Whether to include your primary residence and/or daily driver cars are up to you; there isn’t a wrong way to do it. If you have taken out a loan for it, it might make sense to have it in there, or if you own it outright and may not be willing to part with either of them, you may not want to put it in there. The goal is to be consistent with how you measure so that you can track your progress with some degree of accuracy.
Monthly Income
Another class of an asset would be income. Overall there are two types considered, Active income and Passive income. Active income is what you get from your work at a job, from a business, or from an activity. Passive Income is what you get returned from previous business, activities, or investments in which you are not currently tied. When your Passive Income Exceeds your Monthly Liabilities, then you effectively could retire.
Personal Liabilities
The next category would be Liabilities. Personal Liabilities are mainly any outstanding debts that are owed. As discussed in other posts, there are several different thought processes on debt. Rather than politicize a “which is best” approach, I will only say, the more debt or higher degree of leverage, the riskier your financial situation is.
Monthly Expenses
Other than Personal Liabilities on the “personal balance sheet,” there is also Monthly Expenses. Typically, you should have a plan for any normal expenses and these should be a part of your budget. Other things within a given year that are larger purchases or events can be saved for separately. An example would be to set aside monthly installments to pay for special occasions such as Birthdays, Anniversaries, or Holidays.
Here is an example of the categories within my personal balance sheet:
| Monthly Income | Monthly Liabilities |
| Active Income (Business Income) | Personal Budget Expenses |
| Passive Income (Rental Income) | Rental Expenses |
| Personal Assets | Personal Liabilities |
| Savings/Checking Accounts | Personal Mortgage |
| Investments | Rental Mortgages |
| Retirement Accounts | |
| Vehicles | |
| Personal Homes | |
| Rental Properties | |
|
Net Worth |
Over time the goal is to build passive income, savings, investments, and rental properties; In parallel, also to reduce personal liabilities. By reviewing this annually, or more often as needed, can assure you that you are being a good financial manager of your money.
