Net worth is one of the most important metrics when it comes to your personal finances. It’s the difference between your assets and liabilities, and a good indicator of your overall financial health.
Baron Davis, Personal Capital’s Chief Financial Literacy Ambassador and Financial Hero, knows first-hand the importance of knowing your net worth. Davis didn’t grow up with personal finance education but learned from his grandmother the power of saving. And that lesson turned out to be invaluable later in life when his basketball career ended unexpectedly.
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What is Net Worth?
Simply put, your net worth is the difference between what you own and what you owe. It’s the difference between your assets and your liabilities. Think about it this way: If you were to sell everything you own and pay off all your debt, how much money would you have left?
How Do I Determine My Net Worth?
Calculating your net worth is a three-step process that requires adding up all of your assets and liabilities and finding the difference. It’ll take a bit of legwork up front, but then you can do it on repeat fairly easily.
Step 1: Calculate Your Assets
The first thing you’ll need to do when determining your net worth is to compile a list and the value of your assets. Your assets include any cash and investments you have (aka liquid assets). Your assets also include anything you own that you could sell for cash, such as your home, car, jewelry, collectibles, and more.
Step 2: Calculate Your Liabilities
Now that you’ve added up the value of your assets, it’s time to do the same with your liabilities. A liability is anything that you owe (aka debt) including your mortgage, student loans, car loans, personal loans, and credit card balances.
Step 3: Calculate Your Net Worth
Now that you know the value of your assets and your liabilities, the final step is to calculate your net worth. All you have to do is subtract your total liabilities from your total assets.
Don’t worry if this number is lower than you’d like, or even negative. The most important thing is to keep moving this number in the right direction as you continue to save and pay off debt. By repeating this process throughout the year, you can watch your net worth slowly grow over time.
Why Is It Important to Know My Net Worth?
You might be wondering — why does net worth matter? Is it important to know your net worth even if you’re already tracking your income and spending each month?
While having a firm handle on your monthly spending is critical, it’s only looking at the small picture. It’s a snapshot of how your finances are doing at any particular point in time. Your net worth, on the other hand, is a more holistic, big-picture view. This is important for several reasons.
Calculating your net worth forces you to confront your debts as more than just a monthly payment. It’s easy to gloss over major debt simply because it comes with a low monthly payment. But calculating your net worth will show you how much of an impact that debt has on your overall financial picture.
Your net worth also gives you an idea of your readiness for the future. Planning for retirement requires building wealth so that when you no longer have a monthly income, you’re still financially in a good place. You can make a million dollars per year, but if you spend all of it as you earn it, then your money dries up as soon as you no longer have an income.
This is a lesson that Davis’s grandmother taught him from a young age, and one that turned out to be life-changing when his basketball career ended earlier than planned.
“Growing up, we never talked about financial literacy. I was 19 when I started playing pro basketball. That’s when I decided to learn as much as possible — to protect myself and understand the power of saving.” Davis said.
Everyone deserves to know their true net worth. That’s why, since 2009, Personal Capital provides free, powerful, professional-grade financial tools. Now, Baron Davis is joining us, to bring these tools and financial empowerment to the communities that need it most. Whether you’re starting your career or planning for retirement, we believe access to financial tools will help you on your path forward.
Ready to take a stand for financial empowerment?
Personal Capital compensates Erin Gobler (“Author”) for providing the content contained in this blog post. Featured individuals are paid spokespeople and not clients of PCAC and do not make any endorsements or recommendations about securities offerings or investment strategy.