In corporate accounting, the accountant’s equation looks like this:
Assets = Liabilities + Capital (or Stockholder’s Equity)
In personal finance, the equation is written a little differently:
Assets – Liabilities = Net Worth
Calculate Your Assets
- List your largest assets; for most individuals this includes real estate and vehicles
- Next, list your “liquid” assets–checking and savings accounts, CDs, IRAs, 401(k), stocks, bonds, and cash on hand
- Lastly, (and this is the most time-consuming part) you will want to take an inventory of your other assets: household goods, clothing, jewelry, tools, collections, etc.
Tip: While you are cataloging these assets, I recommend taking photographs of valuables and creating a corresponding list of serial numbers, model and part numbers and other identifying information. If tragedy strikes, this detailed list will aid in insurance claims or police reports.
Add items 1-3 to get your total assets. If you like a more detailed schedule of assets, item 2 represents your Current Assets and items 1 + 3 equal your Fixed Assets.
Calculate Your Liabilities
- List all your major debts. This includes mortgages, car loans, student loans or other large debts with a repayment schedule. These are considered long-term debt.
- List all your revolving debts including credit cards and personal loans. These items, plus the current period payments from your long-term debt are your current liabilities.
Add your liabilities from items 1 and 2 above to get your total liabilities.
Final Calculation
Subtract your total liabilities from your total assets to find your net worth. If you have more assets than liabilities, you will have a positive net worth. If however, your debts are more than your assets, your net worth will be negative. In rare cases, you may end up with a net worth of zero should your assets equal your liabilities.
While a negative net worth is not ideal, it is useful information that can point to ways to reverse the situation. Perhaps you need to save more money, or you should pay down debts. Sometimes it is best to sell an asset that has a large debt attached (like a house or a car) or is expensive to maintain.