Here’s Why You Should Know Your Net Worth

Here’s Why You Should Know Your Net Worth

Here’s Why You Should Know Your Net Worth
Reading Time: 4 minutes

If you empty your accounts and sell everything you own to pay off all of your liabilities, how much money will you have left? That balance is your net worth. Companies, individuals, and industries track their net worth in order to know where they stand financially at any given time.

Knowing your net worth helps you evaluate your current financial position and take necessary steps to secure your future. This article will explain how to calculate your net worth and why it is an important tool. 

What Is Your Net Worth and Why Does It Matter?

Net worth is a financial metric that puts your finances into perspective and helps you plan for the future. A big paycheck or an impressive portfolio may not be enough to secure your financial health given your liabilities. You must consider your finances as a whole.

Your net worth may be positive or negative. To have a negative net worth means that what you owe exceeds what you own, not a great place to be financially. A negative net worth is common among individuals who begin their careers saddled with student loans, car loans, and other large expenses that they must pay with their salaries alone.

Although having a negative net worth does not mean that you are doomed, it does means that you have not yet achieved financial freedom and should try to do better. Your net worth helps you see where your money is going and where you want it to go in the future if you are to improve your financial health.

What Is Net Worth?

Your net worth is the value of your total assets—everything you own—minus your total liabilities. Having a positive net worth means that your assets exceed your debts.

For example, if your total assets are valued at $654,000 and your total debt is $186,000, your net worth, the difference between them, is $468,000. That’s a positive net worth. If instead your total debt is $654,000 and your total assets are valued at $186,000, your net worth is negative $468,000.

What Are Assets?

An asset is anything of economic value that can be converted into cash. Assets can be liquid or illiquid. Liquid assets consist of cash or can very readily be converted into cash; illiquid assets may take longer to convert to cash.

Cash in hand and in regular savings accounts, certificates of deposits, and retirement savings are examples of liquid assets.

Examples of illiquid assets include your home and other properties; your vehicles; your life insurance policy, since it provides a guaranteed payout for as long as the policy is in effect; personal valuables like collectibles; mutual funds, stocks, and bonds; precious metals like diamonds, gold, and silver; and intangible assets like copyrights, trademarks, royalty agreements, patents, mineral rights, franchise agreements, and distribution rights.

What Are Liabilities?

Liabilities are debts, anything of economic value that you owe to other parties. Liabilities are paid by transferring economic benefits like money, goods, or services to the person or organization that you owe.

Unlike assets, which represent value and often add money to your pocket, liabilities take money from your pocket now or in the future. They include everything from your mortgage and car loan balances to accounts payable, accrued expenses, warranties, and deferred revenue.

If you have promised to make certain payments but haven’t yet done so, these promised payments qualify as liabilities. Thus, salaries and wages owed to your domestic workers are liabilities.

Paying off your debts decreases your liabilities and increases your net worth proportionately.

Why Net Worth Matters

Net worth is an important financial indicator that helps you track your financial progress.

Knowing your net worth helps you determine whether you are saving enough money for retirement, emergencies, and other financial goals; whether you are progressing, stagnating, or backsliding with respect to these goals; and how debt and poor financial practices like overspending and gambling are preventing you from achieving them. With a better idea of how you are lagging financially, you can create strategies to improve.

Periodically reviewing your net worth helps you to clearly set financial goals and to adjust them in light of your progress.

How to Calculate Your Net Worth

The first step in calculating your net worth is to add up all of your assets and write down their total value. To do so, make a comprehensive list of everything you own of significant value: cash on hand, bank savings, house, car, etc.

Since you can’t list everything no matter how small the value of an item may be, you should set a reasonable threshold: say, anything with a value of $100 or more. Estimate current value while taking into account depreciation of fixed assets like your car or house.

First list large assets like your home, vehicles, commercial real estate, boats, and planes. If you own a business, also Include its value, determination of which may involve a different set of calculations. Then note liquid assets like cash in hand, bank account balances, and investment portfolios. Finally, list other personal items with significant monetary value like jewelry, heirlooms, and collections of coins, rare wine, and art.

Add up the individual values of these assets to get the value of your total assets.

Now tally all of your liabilities, things like your mortgage balance, credit card debt, and outstanding loans. Add them up to get your total debt.

Subtract your total debt from your total assets. The difference is your net worth, determined in accordance with a well-known textbook equation:

Tracking Your Net Worth Over Time

Periodically check your net worth to get a clear picture of where you have been, where you are now, and whether you are moving towards your financial goals.

It is normal for your net worth to fluctuate. But even if you have no set standard for the net worth you deem desirable, it is important to aim for a positive net worth that grows consistently over the long run.

Knowing your net worth can help you make the best possible financial decisions. The knowledge will help you see the big picture and determine whether a given financial move is feasible.

Average Net Worth by Age

You need a net worth of about $7 million to join the list of the wealthiest individuals in Canada. As of 2021, only 27% of Canadians are regarded as financially healthy, with 15% regarded as financially vulnerable. About 31% are in more debt than they can comfortably handle.

Use this table, showing the average Canadian net worth in different age cohorts, to compare your net worth to that of other Canadians.

Age

Assets (CAD $)

Liabilities (CAD $)

Net Worth (CAD $)

Less than 35

328,500

108,600

219,900

35 to 44

691,400

191,900

499,500

45 to 54

1,137,000

190,100

946,900

55 to 64

1,204,300

100,900

1,103,400

Your Net Worth: The Bottom Line

Unlike other financial indicators, your net worth tells you about your overall financial health. Tracking net worth is not enough, however. You must work to ensure that your net worth continues to grow. Your net worth will grow if you’re critical about your spending, pay down your debt, save and invest, and periodically reevaluate your financial progress.

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