Regardless of age, life stage, or any other demographic, most of us want the same thing: to reduce stress around money and experience the financial freedom to pursue our dreams. In order to do so, you should come up with an actionable plan.
In your research, you may have heard terms like asset management and risk mitigation. This terminology is important, but it can potentially overwhelm you if you’re unsure of where to start.
Saving and investing takes planning, but it doesn’t have to be complicated – and there’s a first step you should take. Before you can successfully implement a personal finance strategy that helps you reach your goals, you should calculate your own net worth to get a clear picture of where you stand.
What is Net Worth?
If you’ve ever wondered, “How do I calculate my net worth?”, you’re in the right place. Net worth is calculated using a simple formula. First, add up everything you own – these are your assets. Then, subtract everything you owe – these are your liabilities.
Even though many of us have been out of school for a long time, a net worth calculation serves as a kind of report card. It is an indicator of your current financial situation, showing you which areas of your finances are receiving a passing grade and which areas need tutoring.
Calculating Your Personal Assets
To calculate your net worth, begin by determining the value of your personal assets. For most people, assets include many of the following categories.
Real Estate
If you own a home, try to come up with a figure based on its current market value, not your purchase value – especially if you have owned it for a significant amount of time. Homes can increase or decrease in value. Typically, they are an appreciating asset. If you personally own additional properties, calculate the market value for those as well.
Vehicles
While vehicles tend to lose value over time, making them depreciating assets, they still have the potential to add value to your asset list. Include any cars you own, and don’t forget to add RVs, boats, motorcycles, or other vehicles.
Valuables
From heirloom jewelry, artwork, or prized collections to household items, the contents of your home can add up to more than you think. While it is not realistic to value all the items in your entire house, make sure to include significant purchases like furniture, electronics, and silverware or jewelry.
Retirement Accounts
If you have any kind of IRA or 401(k) from your employer (or if you opened one yourself!), add the current balances to your asset list.
Other Investments
In addition to your retirement plan, you may have other investment accounts that include stocks, bonds, or mutual funds. Check those balances and add them to your asset list.
Other Funds
Don’t forget to factor in the most recent statements from your bank accounts, both checking and savings. Add in any cash you have outside of your bank accounts, too!
Calculating Your Personal Liabilities
Once you’ve totaled your assets, it’s time to subtract your liabilities. These can vary greatly by person, but they typically include the following two categories.
Mortgages
If you financed the purchase of your home, the outstanding balance of your loan will be on your liabilities list.
Loans
In addition to mortgages, there are other kinds of loans that create liabilities. The most common are auto loans, student loans, or personal loans. The outstanding balances of these loans should be added to your liabilities list.
Other Debt
Other types of debt include credit card debt, lines of credit, liens and medical debt. These forms of debt may revolve depending on your use of them or change depending on your circumstances. The current balances of these forms of debt would also be added to your liabilities to determine your “net” worth.
How to Increase Your Net Worth
Once you’ve calculated your current net worth, you’ll probably want to look for ways to increase it over time. Increasing your assets and minimizing your liabilities can help your net worth grow and potentially leave it to a future generation. The following are potential ways to increase your net worth.
Reduce spending
As you add up your expenses, you may find areas you want to trim back costs. Creating and sticking to a budget can help you find savings in places you never thought to look previously.
Pay off liabilities
Eliminating loans and debt can improve your personal net worth over time. Using your budget, you can make a plan to pay off student loans, credit card debt, or other liabilities.
Build equity
Investing in an appreciating asset like a home can help you build your net worth over time. Even though you’ll likely be taking out a home loan, you’ll gain a potentially appreciating asset.
Increase investing
It’s never too early in life or too little to invest, and a good investment strategy can build your assets over time. If you have positive cash flow but aren’t sure where to begin, talk to a financial advisor about your investment options.
At Marietta Wealth, we are here to help you create an investment plan that’s tailored to your needs and goals.
Finding a Financial Partner
When it comes to personal financial planning, it’s important to find a partner you can trust. Marietta Wealth is an investment adviser to our clients, always working in your best interest to help you create the financial future you desire most.
If you need help calculating your personal net worth or creating a plan that helps you build it over time, give us a call. Our advisors would love to begin the journey with you.
Marietta Wealth is a registered investment adviser. Registration of an investment adviser does not imply any level of skill or training. For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website.
This article is not intended to be used, and should not be used, as the sole basis for legal advice. The reader should seek and rely upon the guidance and advice of legal counsel before making decisions regarding any estate planning tools or documents.