by Kevin Sun
When’s the last time you chatted with friends about your financial net worth? Probably never, and for good reason since that’s not much of a topic for casual conversations. However, like knowing your expenses and debts, knowing your net worth can help you take stock of your financial health and set goals for improving it.
How to Calculate Your Net Worth
If you’ve never calculated your net worth before, then knowing how it works will help you understand how knowing where you stand helps you. Put simply, your net worth is the money you have minus the money you owe. It’s more than just equity because it accounts for your savings too.
The money you have are the bills in your wallet, the balance in your bank account, and the dollar values of some of your stuff: your vehicle, property, valuable possessions, investments, etc. The money you owe are your debts, including credit card balances, outstanding amounts on lines of credit, and any loans you’ve taken out. To give a simplified example, if you own a house that’s worth $400k and have a mortgage of $300k, then your net worth is $100k.
If tallying up all of the above at once feels overwhelming, then here’s a breakdown of steps you can follow:
- Add up all of your savings. This includes cash in your wallet, money in your bank account, and the dollar values of any investments you own, including what’s in your TFSA and RRSP accounts.
- Add the values of all assets you own, including vehicles, properties, and personal items like jewelry, art, and antiques that have been appraised (i.e. an expert told you how much it’s worth).
- While the more accurate the better, it’s okay to make rough estimates.
- Subtract all of your debts.
The number you get after following these 4 steps is your financial net worth. Of course, your net worth changes as you earn and spend money, which are 2 things you can easily track with our Income & Expense Tool. It will also naturally change as time passes, so a good rule of thumb is to calculate your net worth at least once a year and also whenever you need to use it.
How Knowing Your Financial Net Worth Helps You
Your net worth is useful because it gives you half of the big picture on your financial situation (the other half being your monthly income and expenses). Keeping this big picture mentality in mind will help you avoid focusing too much on smaller parts, especially when changes happen.
For example, a sudden emergency that costs you $1000 might have you feeling like the world is ending, but comparing this to your overall net worth could put that into perspective and help you realize that things might not be so bad after all. On the other hand, a $1000 bonus might have you planning your next big purchase, but if you remember that your net worth is still being held down by issues like debt, then you might have important second thoughts before clicking that order button.
When you have a goal to get out of debt, your net worth (or rather, the calculations behind it) can shine light on possible solutions. You might have options to consolidate or deal with your debt using equity you didn’t know you had.
What Your Financial Net Worth Doesn’t Show
While your net worth helps you see the big picture about your personal finances, it doesn’t give you the whole picture. After all, not everything can be sold as easily as a car, and everyone can have things that they just don’t want to sell. Your financial net worth is just that: financial. It won’t cover other important parts of your life that also affect your decisions, and it may even give the wrong impression. For example, even though a student loan could make your financial net worth negative now, getting the education you need can open invaluable opportunities for personal and financial growth.
Your financial net worth is a powerful tool, but one of many. Use it with other tools like your budget to manage your personal finances and guide progress towards your goals. Also keep in mind that whether you just started your career, are close to retirement, or fall somewhere in-between, there’s no such thing as an ideal net worth. Only you can decide if your finances are where they should be.
Non-Profit Credit Counselling – A Useful Tool to Help Improve Your Financial Net Worth
Speaking of tools, one that many people don’t know about is a free and confidential appointment with a non-profit credit counselling organization. Counsellors are experts at assisting Canadians with reviewing their situation and finding the right solutions for them. Just like your financial net worth, a non-profit credit counsellor can be a valuable resource to help you reach your financial goals.