The Common Way To Calculate Net Worth
I’ll be honest, there are different formulas to calculate your net worth. The most common way that I have been shown is a really straightforward approach to calculating your net worth. It is the simple formula:
Assetes – Liabilites = Net Worth
The Best Way To Calculate Net Worth
Josh Gault, a Personal Finance and investment coach, gives a better perspective on how you should calculate your net worth. He treats thinks about net worth more like an accountant would think of a business. He uses an approach that looks like this:
Depreciating Assets +Assetes – Liabilites = Net Worth
It is important to categorize your assets when you are thinking of changes in your net worth. Our objective is to increase our net worth over time. Below I give you the definition of what each of these means to me with an accountants explanation of why I like this way instead of the traditional calculation.
Assets That Depreciate
Depreciating assets are necessary, but the point I want to make is they will lose you money over the long term. A perfect example of a depreciating asset is a vehicle. I actually believe in owning depreciating assets a long time. I drove the same Jeep from 2002 up until 2016. (My Freinds thought I was going to own it forever) The reason I didn’t get in a hurry to purchase a new car is because I understand that as soon as you leave the lot that vehicle looses value.
The reason I didn’t get in a hurry to purchase a new car is because I understand that as soon as you leave the lot that vehicle looses value. Every time you put a mile or kilometer on your vehicle it looses value. As Josh points out, that there are other assets you could add to this list. Are you planning on a home renovation, do you purchase a vehicle every two years, are you buying toys on credit?
Assets That Appreciate
What do wealthy people purchase? I have learned from studying wealthy people that they make their money work for them. Josh points out in this calculation that assets are things that make you money off your money. Wealthy people own equity investments or get paid interest.
Equity investments could be classified as ownership in a business. This doesn’t mean that it is always in the stock market. The money you invest in your business will make you money back through equity and dividends.
Interest Income People who make or save more than they spend make money off their money through interest. This could be through their savings account, CD’s or another source of Intrest. (Not with the current state of the Economy)
This is considered any debt that you have. Your mortgage, student loans, Auto Loans or anything that is costing you interest. My overall strategy that I have adopted from Josh is to get rid of the liabilities, limit the depreciating assets and increase your assets.
The total value of Depreciated Assets (At their market value) +Assets-Liabilities Gives you a clear picture of your financial position. Use my Net worth calculator to see where your financial position stands.