Have you ever taken the time to calculate your net worth?

It’s something that most people have never done despite it being one of the most important financial numbers. It doesn’t matter how young or old you are or whether you consider yourself rich, poor or somewhere in between.

It’s fairly simple to figure out your net worth. If you haven’t done it yet, let’s walk through why it’s important and the best way to calculate it.

What is Net Worth?

Net worth is simply your financial assets minus your financial liabilities. All of the stuff you own minus all of the stuff you owe.

The end result after that calculation is your net worth. It’s an indicator of your overall financial health.

Why it’s Important to Know Your Net Worth

Now that we know what net worth is, what does that mean to us? Why does it matter so much?

Obviously, you want to have a positive balance after you take any liabilities into consideration. But beyond that, why does it matter what our net worth is?

An Indicator of Your Financial Health

When you go to the doctor, your visit usually starts with someone getting your vital signs. Things like your temperature, blood pressure, and pulse are all indicators of where you are at physically. A doctor might be able to walk into the exam room and know how you are feeling based on how you look, but your vital signs provide information his eyes can’t see.

The same holds true for your financial health. It’s easy to look at your bank account and feel good that there’s a positive balance. But knowing your net worth provides a more in-depth analysis of where your finances are at. It’s not all about your income. Your financial health is more about how much you save.

Measures Your Progress

Knowing your net worth allows you to track where you’ve been and where you are going.

• Are you building up your savings?
• Are you making the right investments?
• Is your spending out of control?

All of these questions will be answered as you start to track your net worth.

Provides Motivation

When you know where you stand financially, you can start to set goals for your finances. As you set goals, you can look at your net worth, see your progress, and push forward. There will be times when you want to splurge. Or there might be times when you feel like you're not making progress. Being able to look and see just how far you have come is a powerful motivator.

Allows You to Track Your Debt

As we mentioned earlier, net worth is your assets minus your liabilities. Debts are liabilities. It makes sense that your financial health will improve and your net worth will increase as you get rid of debt.

Once you start seeing those debt numbers fall, you're going to get excited! It’s almost intoxicating. There’s a wonderful sense of freedom when you finally get out from under your debt. Tracking your net worth gives you a front row seat to see your debt get erased.

Related Article: Climb Out of Massive Debt with These 10 Life-Changing Steps

Helps You Think Long Term Financially

What kind of goals have you set for your finances?

Knowing your net worth allows you to view your finances through the lens of long term goals. When I was younger all I cared about what that there was enough money in my bank account to pay my bills and have some fun. I’ve become wiser as I’ve grown up, having learned the importance of planning for the future.

There are times when I want to revert back to that young man. Having fun is … fun. But being able to look at my net worth allows me to see what I’m capable of spending without affecting my long term goals. For the record, knowing your net worth, setting and reaching goals, and killing debt will provide plenty of freedom for real fun.

How to Calculate Your Net Worth

I mentioned early how net worth is calculated:

Assets – Liabilities = Net Worth

One way to calculate your net worth is to get out a piece of paper or a notebook. You can use your computer too if you prefer. After that, start making lists.

List Out Your Assets

An assets list should include things like:

• Your Home Value (If you are a homeowner)
• Checking accounts
• Savings accounts
• 401(k)
• IRAs
• HSA
• Stocks & Bonds
• Investment Properties
• Businesses
• Cash
• The value of your car(s)
• Recreation vehicles, boats, etc.
• Any other valuable assets you may have

Be sure to list every item as well as their dollar amounts. Add all of them up to get your total assets.

List Out Your Liabilities

Now do the same thing and make a list of any liabilities (debts). This should include things like:

• Mortgages
• Car loans
• Student loans
• Credit cards
• Medical debt
• Personal loans
• Any other loans or debts

Be sure to list every item as well as their dollar amounts. Add all of them up to get your total liabilities.

Subtract Liabilities from Assets

Now it’s just simple math. Subtract your total liabilities amount from your total assets amount and you get your net worth. Pretty simple, right?

What number did you end up with? Was it a positive or negative number? It’s quite possible that you are working with a negative number right now. That’s ok. It could be that you are still paying off student loans or have a couple of monthly car payments that are creating a negative number. Remember the reasons why we track our net worth. The number is important, but it’s more important what you do with that information.

The Best Tool for Tracking Your Net Worth

It’s not difficult to spend a half hour gathering up all your numbers and doing some basic math. However, there are many great tools and apps available that allow you to track your net worth too. I’ve spent time using several options and always come back to my favorite tool. It’s called Personal Capital.

Personal Capital is an online money management system. The site and its mobile app give you access to tons of money tools to help you track your net worth, set goals, and more. The best part about Personal Capital is that it’s free. They do offer other financial services that do cost money, but you don’t have to sign up for them.

Personal Capital allows you to link your bank and investment accounts so you can track your spending and savings. You can link credit cards too. You’ll be able to see your current balances and see expenses in real-time. You can also check on portfolio performance. It covers it all.

It’s easy to start an account. Just go to Personal Capital’s website to sign up. After logging in you can connect all of your accounts and start tracking within minutes. It’s all done securely so there’s nothing to worry about. You can’t control any of your accounts from Personal Capital, only view them. Once you are signed up you can begin tracking your net worth from anywhere thanks to their easy-to-use mobile app.

Ways to Increase Your Net Worth

Now that you know how to track your net worth, the next step is to learn to increase your net worth. How do you do that? While there are many ways to increase your net worth, I’ll mention two of my favorites:

Start Budgeting

One of the best ways to start saving more money and gaining control of your finances is to create (and stick to) a monthly budget. Budgeting allows you to plan for all of your expenses as well as create savings from what’s left over. Once you start following a budget, you’ll be able to look at your expenses and spot areas that need your attention.

Related Article: 10 Budget Apps That Make Your Personal Finance Goals Easy

Eliminate Debt

The less debt you have, the more money you are able to save on a monthly basis towards your goals. There are many methods you can use to erase debt, such as the debt snowball or debt avalanche methods. Do what makes sense for you and your financial situation. Kill that debt and watch your net worth start climbing!

Next Steps

Well, now it’s up to you. Now that you know how to figure out your net worth and why it’s important, get to work.

• Make your lists
• Sign up for a free account from Personal Capital if you want to track your accounts more conveniently
• Analyze your net worth number
• Create some long term financial goals and start working to increase your net worth

It doesn’t take that much time and the investment will pay off big time for you and your family.

Are you tracking your net worth?

Please let us know in the comments below.