Net worth is a fundamental measure of an individual’s or a business’s financial health because it represents the difference between the total assets you own and the total liabilities or debts you owe. In simpler terms, think of it like a snapshot of your current financial position.
For individuals, knowing your net worth is a useful tool to see how financially stable you are right now, and plan for future goals like retirement savings, debt consolidation, and cash management, or making big investments.
For businesses, you might see it referred to as equity or book value on the balance sheet.
How to calculate net worth
Calculating net worth is very straightforward:
Net worth = Total assets − Total liabilities
Assets
These include anything you own that has financial value. Generally, they are separated into two categories: tangible (physical items) and intangible (non-physical but monetary assets), with a few examples being:
- Cash: Money in bank accounts and savings accounts.
- Investments: Shares, bonds and retirement accounts like superannuation.
- Property: Your home, investment properties and potentially commercial real estate (for businesses).
- Vehicles: Cars, boats and motorcycles, valued at their current market value.
- Other assets: Art, jewellery and other collectibles that can be sold for cash.
Liabilities
Liabilities are your debts that you need to repay, with the most common liabilities including:
- Home mortgage.
- Car loans.
- Credit card debt.
- Personal loans.
- Student loans.
- Other liabilities like tax or unpaid bills.
As an example of net worth, imagine someone with the following:
Assets:
- Home valued at $700,000
- Superannuation balance of $200,000
- Bank savings of $20,000
- Car valued at $30,000
Liabilities:
- Home mortgage balance of $400,000
- Credit card debt of $10,000
- Car loan of $15,000
In this scenario, you’d use the following calculation:
Net worth calculation = ($700,000 + $200,000 + $20,000 + $30,000) − ($400,000 + $10,000 + $15,000)
Net worth: $950,000 − $425,000 = $525,000
This person has a positive net worth, which means their assets are higher than their liabilities.
Positive vs. Negative net worth
Having a positive net worth means your assets are greater than your liabilities. As you are in a healthy financial position, it means you can take advantage of financial opportunities and secure better loan terms, as well as plan for the future with total confidence.
On the other hand, a negative net worth is when your liabilities are higher than your assets. If you owe $1 million on your mortgage but your property is only worth $950,000, for example, then that liability puts you in a negative financial position.
Negative net worth doesn’t always translate to poor financial management – it can be common at certain stages of life, such as early in your career when debt like personal loans might outweigh your assets.
4 reasons why knowing your net worth is important
- Track your financial progress: A rising net worth shows you possess good financial habits, while a decline could mean you need to adjust a few things.
- Set achievable financial goals: Knowing your net worth means you can plan for a more comfortable retirement or pay off your home faster.
- Spot (and fix) any problem areas: High credit card balances or outstanding debts can hinder your financial growth. Your personal balance sheet will highlight any and all areas to improve.
- Become a more attractive borrower: Banks and lenders will look at your net worth when considering loan and mortgage applications.
Tools for calculating net worth
Using a net worth calculator can simplify the process of adding up all your assets and liabilities. There are lots of free online tools that will let you enter the details of your finances and give you an instant calculation.
It’s also a good idea to use spreadsheets and other financial apps. Tracking your net worth in a spreadsheet or personal finance app means you’ll be able to regularly update values and monitor any big changes over time.
How to improve your net worth
Raising your average net worth over time is possible – you’ll just need to focus on a few strategies that either reduce liabilities or increase financial assets. Here are some suggestions:
1. Pay down debt
Getting rid of high-interest debts like credit card debt and personal loans will free up money for saving and investing. Strategies like the debt snowball (paying off smaller debts first) or debt avalanche (tackling high-interest debt first) can be helpful here.
2. Build savings
Make regular contributions to your savings account and super fund to boost your asset base. Setting up an automatic savings plan will make consistency a breeze.
3. Invest wisely
Investments in stocks, bonds, or property can grow your financial assets over time. If you’re unsure, speak to a financial advisor to develop an investment strategy that matches your goals.
4. Increase your income
Maybe you can boost your earnings through a side hustle, or go in search of higher-paying roles to give you the extra funds you need to pay off debts or invest more.
5. Get a handle on your spending
Budgeting can help you control unnecessary spending and make sure your money is working towards improving your net worth.
Net worth and financial products
Banks and lenders use net worth to see whether you’ll be a good fit for certain financial products like:
- Home loans: A high net worth can improve your borrowing capacity and help you lock in lower interest rates.
- Investment products: Some products are reserved for high-net-worth individuals.
- Insurance: Your net worth can influence the amount of cover (and premiums) for life and asset insurance.
What is a good net worth?
There’s no one-size-fits-all answer, unfortunately. It really does depend on your age, lifestyle and financial goals. A 30-year-old saving for their first home, for example, will have a lower net worth than someone approaching retirement who has multiple investment properties.
Bear in mind that while net worth can give you a decent snapshot of your overall financial position, it doesn’t account for liquidity (availability of cash) or your future earning potential. For example, owning a valuable property doesn’t help with immediate expenses if the funds are tied up in equity.
Improving your net worth isn’t about overnight changes. Instead, it’s about consistently making smart financial decisions that line up with your long-term goals.
