Are you one of those people who have read an entertainment article that disclosed the net worth of your favourite celebrity and wondered how this figure was arrived at and how could you work out yours? Sure, you may not be worth as much as Beyoncé, but just how much are you worth, exactly? And does it even matter?

What is your net worth?

Your net worth is the grand total arrived at when you subtract the total of your assets from your total liabilities. In other words, it’s the difference between what you own and what you owe at a particular point in time. (Note, also, that net worth can be calculated for a business, too, using the same metric.) It’s important to make that time distinction, because your net worth, like the value of stocks on the stock market, is not fixed; it constantly fluctuates.

Is it important?

Remember, when you were a child in prep or primary school, how you used to get a report card to take home to your parents each term? It served as a document that made you and your parents aware of the progress you were making (or not) in your studies, and helped all parties to understand where more effort and care should be taken, in order for you to have a firm scholastic foundation. This is in essence what knowing what your net worth is like. If you’re a person who is serious about financial security, periodically calculating your net worth helps to paint a picture of whether you’re making headway in achieving your financial goals.

How to calculate net worth

Calculating net worth can be summed up with the following equation:

Assets – Liabilities = Net Worth

First, calculate your assets. Assets are anything of value that can be converted to cash. So, assets include things like your house, a plot of land, investments, personal property like valuable jewellery and family heirlooms, art, and collectibles, and raw cash itself.

Start with your largest asset; your house, land, a car that’s paid off (the more equity you have in your home or vehicle, the more your net worth will increase). Avoid the tendency to inflate these values; stick to a conservative path. So, let’s say the total value of these come up to $5 million. Next comes your more liquid assets: Savings, cash, CD, other investments that can be fairly easily converted to cash, including brokerage accounts and retirement accounts. Let’s say these are worth $800,000. Finally, add up the value of other personal items: A Barrington Watson painting, expensive jewellery, even a mint-condition, rare, first-edition book or a musical instrument. Let’s say these are worth $150,000.

$5,000,000 + $800,000 + $150,000 = $5,950,000

Next, calculate your liabilities, also known as debt, which include loans, mortgages, outstanding credit card balances, medical bills, student loans, and things of that nature. Start with the major debt. For mortgages or a car you’re still making payments on, you would calculate the amount that’s left to be paid on them. Say your total debt is $3 million. Subtract this from the total value of your assets. That figure is your net worth.

Net worth: $5, 950,000 – $3,000,000 = $2,950,000

Positive and negative net worth

Your net worth can be positive, as in the above example. Obviously, everybody wants a figure that’s positive. It means that you’re on track, for the moment at least, to your financial goals. Remember, however, that, like the stock market, in a blink, you could see a reversal of fortunes. Say a critical illness befalls you or a member of your family and you have to dip into your emergency savings or sell off an asset to the tune of $2 million overnight. See how quickly $2.9 million net worth can be whittled down to less than $1 million? This is why net worth figures are not static, and should be checked from time to time.

Your net worth can also be negative. If your net worth is a minus figure, it simply means you owe more than you own. There’s no shame in this. All it means is, just as when you got a not-so-glowing report card back in the day, you simply need to figure out how you can do better. If your net worth is a minus figure, construct a new financial plan. What is it you can do differently to get better results? If, say, you subscribe to a budget plan that sees you spending 50 per cent of your after-tax income on needs, 30 per cent on wants, and 20 per cent on savings and paying down debt, what if you instead spend 20 per cent on wants and the remaining 30 per cent on savings and paying down debt?

Your net worth is a temperature check on your current financial health. Learn how to calculate and interpret it. When you know where you stand, you’re better equipped to make sound financial decisions that will affect how quickly you achieve your short- and long-term financial goals.