Understanding your net worth is a significant step to organizing and building your finances as you strive to attain your financial goals. Whatever those goals are, whether you are saving towards a large purchase such as a property, for your children’s education or planning for your retirement, your net worth statement provides you with important information.

For you to be able to plan successfully for the future, you need to know where you stand now. Your networth is one of the most accurate measures of your financial health and progress as it presents you with a true picture of your financial condition at a point in time; a snapshot of your current financial standing.

Your networth statement will also come in handy when you are applying for a loan such as a car loan, credit card or a mortgage. Potential lenders will ask for a net worth statement when you apply for a loan. If you have fairly up-to-date documentation on hand, it will be that much easier completing the loan application. As it reflects what you actually own, they can look closely at your current assets and liabilities, and they like to see that you have an investment portfolio.

Calculating your networth : Total Assets – Total Liabilities = Networth

Calculating your networth is a fairly straightforward process. It lists your assets (all that you own and value) and subtracts your liabilities (all that you owe).  Before you embark on this exercise, get yourself organized and gather all your financial documentation; your bank statements, investment advices, receipts and so on. Here are some simple steps to help you to calculate your net worth.

List your major assets. What is the value of your car, your home and any other property you might own? It is best to be conservative in your estimates so that you do not distort the true picture of your net worth. Your home is likely to be your largest single asset and your mortgage, your biggest liability. You can get a fairly accurate idea of what it’s really “worth” by finding out what homes are selling for in your area. Particularly during a recession or periods of economic difficulty, real estate is not easily marketable so be realistic in your estimates.

List other assets such as cash, bank accounts, certificates of deposit, stocks, bonds, mutual funds, retirement savings and life insurance policies that have accumulated cash value.

Do you have any valuable personal effects such as jewelry, an expensive wristwatch, a significant musical instrument, some special furniture or valuable artwork, a serious coin or stamp collection or any family heirlooms? Don’t list everything, just things of significant value. Again, be sure to list themarket value of such assets, as their real value is only what the market is prepared to pay for them and not what you would like the value to be.

Add up all the assets that you have listed to get your total asset figure. Determining the value of your valuables is not only necessary to figure your net worth; this information will also be very useful in ensuring that you are better able to protect your assets by having adequate insurance coverage.

Now list and add up your liabilities or what you owe such as your mortgage balance, car loans, outstanding balances on your credit cards and any other personal debt obligations.

Finally, simply subtract the sum of your liabilities from the sum of your assets and the result is your net worth.

The ultimate objective of this financial exercise should be to increase your networth. Ideally, your networth should be positive and steadily increasing over time. It has little to do with how much you earn; as the old saying goes, “it’s not what you make, it’s what you keep.” If you have a positive net worth, you can start working on building on this momentum.

If your networth is negative, with your liabilities greater than your assets, don’t be discouraged. That is the purpose of this exercise. This should jolt you into making necessary changes in your financial situation. No matter where you find yourself today, now that you know exactly where you stand, you can begin to set personal financial objectives and take deliberate steps to work towards achieving them.

There are personal finance software packages such as Quicken that will easily compute your net worth for you once you have inputed all the necessary information. These programs are designed specifically for tracking investments and other assets as well as any debts and can support you in your personal financial management.

How to grow your networth

If you have no debts except your mortgage, you can afford start to build a surplus that can be invested in assets that are likely to appreciate more than the inflation rate over time, such as property, shares, mutual funds and other investments. Remember to take advantage of any windfall income such as bonuses; instead of spending them, funnel such unexpected proceeds into productive assets or into reducing or paying off your debt. If you have some outstanding high-interest loans, you should be paying those off as quickly as possible. That will give you the highest return for your money. It pays to keep your liabilities manageable.

Track your progress

For many people, computing their net worth is purely an academic exercise with very little impact on the way they handle their finances. For others, it can be a powerful motivator. The raw networth number itself isn’t really all that meaningful; what is much more useful, is the change over time. Try to go through this process at least once a year and track your progress by comparing your net worth to earlier net worth calculations. As you work towards increasing your net worth there will be a natural incentive for you to rein in any excess spending, to work to pay off your debts, and to save and invest towards a secure financial future.