In this 6th step, you are going to determine your overall financial starting point by calculating your net worth. I know the words “calculate” and “net worth” might be putting you off, but this step is a lot easier than it might sound, as we have already done all the preparation work in the last few steps by digging up financial statements and creating our assets and liabilities lists in step 4 and 5.
Your net worth basically indicates what would happen if you decided to sell all of your possessions and pay off all of your debts today: would you any have money left over or would you still be in debt? How much money would you have left over or how much money would you still owe? Your net worth is an easy sum of your total amount of assets minus your total amount of liabilities.
The huge advantage of calculating your net worth is three-fold. Firstly it tells you what your starting point is and how positive or not so positive this is. Secondly it gives you an easy method to calculate your financial progress over time, as you can re-calculate your net worth on a regular basis, and hopefully see an increase in your net worth with time. A third advantage is furthermore that it allows you to set financial goals with a clear time frame attached to it. I.e. you can set yourself the goal of “increasing your net worth by $10.000 in 2 years” for example.
Step 6 – Calculate your Net Worth – in detail
- Get your journal, Evernote document, or digital spreadsheet out and write down today’s date.
- Write down “total value assets” and just below that “total value liabilities” and lastly just underneath “total net worth”.
- Pull out your list of assets with their estimated values of step 5. Add up all the numbers to get your total value of assets. Add this number to your document next to “total value assets”.
- Look back at your list of debts that you put together in step 4. Add up the amounts of each debt to find out your total amount of debt. Write this number next to “total value liabilities”.
- Take your total value of assets and subtract the total value of your liabilities to find out your net worth. For example if your total value of assets is $40.000 and you’ve got a total of $70.000 in liabilities, your net worth would be -$30.000 at the moment. Write this figure down next to “total net worth”.
- There you go that’s your current net worth!
- You’ll want to calculate your net worth on a regular basis, probably once every three months to start with, although if you feel like doing it more often, then by all means go ahead. Take out your calendar or journal and already decide on the next time to calculate your net worth. Mark it down in your agenda or set it up as a recurring date in your digital calendar.
Obviously as you can probably imagine, having a negative net worth is not the best starting position as it means you owe more than that you own. But don’t despair if that is your starting position, there are many people in the same situation and you too can turn this into a challenge and little by little start working towards getting a positive net worth. It will take time, but many others have achieved it or are on their way to achieving this. If you are already starting with a positive balance, then you’ve got a slightly more positive start, although I am sure that you will want to increase your net worth regardless and keep working towards the financial freedom that is ultimately our mission!