What goes into a Net Worth Calculation?
I have been doing this for so long I forget that sometimes people have very confused ideas about what goes into a net worth and what doesn’t.
I don’t think I have ever done a “what is net worth” post because I’ve always assumed everyone knew this, but I got a few questions the other day that made me realize that I should write a post and have it once and for all for others to refer to.
First, let’s just clarify what these terms mean, to me anyway.. there is always room for interpretation of course.
INCOME: Whatever hits your bank account regularly and can be taxed
Common sources of income:
- Your Salary from your day job/career (usually net after taxes)
- Dividends (sometimes put on a DRIP)
- Things you’ve made for sale – items, books, etc.
- Items you’ve sold on Kijiji, Etsy, Ebay or Poshmark (here’s how to sell online)
- Blog/Youtube/Instagram Advertising/Royalties/Affiliate Earnings
- Interest repayments from peer-to-peer or business lending (like private lending)
- Credit card and other cashback rewards like Rakuten
What is not considered income:
- Health benefits or repayments from paying for health (e.g. you bought glasses, they paid you back)
- Tax refunds (this is your own money you lent to the government for free at 0% interest)
- Appreciation on your investments (capital increases, stocks going up etc) and it is all on paper anyway
EXPENSES: Whatever you spend and is gone
Common sources of expenses:
- Groceries/Eating Out
- Debt Repayment
- Bank Fees – these are dumb AF, please don’t pay them – find a no fee bank account or be smart about taking out your money especially from convenient ATMs; this drives me INSANE when people pay a fee to take out their own money because they can’t be bothered to be organized and go to the bank for their own cash
What is not considered an expense:
- Savings – you’re just moving your assets from your bank account into another bank account.
- Investments – same as above, it is still money in your possession
Now, your Net Worth = Assets minus Liabilities
Seems simple right?
This refers to your financial situation.
ASSETS: What you have and can turn into cash
Common sources of assets:
- Savings accounts
- Investment accounts
- House/Rental properties
- Car – More on this later, this is a grey area
- Personal belongings – More on this later, this is a grey area
- Gift Cards – This is also a grey area, some don’t see it as an asset but I see it as an open balance to a store you were planning on shopping at anyway.. so why not? E.g. Starbucks cards
- Pension plans – current balance only, and only what is in your name / tied to you*
*I do not count any Canadian retirement programs like Old Age Security (OAS), Canadian Pension Plan (CPP) or any of those others as assets because I see them as $0. All this money goes into one big communal pot and it will be a crapshoot by the time I actually do retire, if I have any money at all considering the population of Boomers living longer, eating up those assets, and the declining younger generations procreating less and in general, not putting in money in this pot.
What is not considered an asset:
- Insurance policies – you can’t use the money until you die or something happens – not an asset, this is an expense if anything
- Health insurance benefits
- Anything you can only use for a singular purpose –
- Future values of pension plans – If it is estimated to be valued at $3M in the future, YAY! Do not count this amount as your net worth though, because this is an ESTIMATE not ACTUAL. I only care about what is ACTUALLY in your bank account or pension plan, TIED TO YOU and your name.
LIABILITIES: What you owe others
Common sources of liabilities:
- Credit card debt
- Car loan
- Lines of credit
- Outstanding taxes
- Personal/Family debts – what you owe other people individually
What is not considered a liability:
- What you don’t owe. I have no idea.
NET WORTH CALCULATION
So it is pretty simple. Take what you own, minus out what you owe.
Assets = $605,000
- $500,000 = House value
- $100,000 = Retirement Savings
- $5000 = Savings
Liabilities = $425,000
- $400,000 = House mortgage
- $25,000 = Line of credit
$605,000 – $425,000 = $180,000
Your net worth = $180,000
What should my net worth be?
- How much should you have saved for various income salary levels at retirement?
- What should my net worth be?
- How much should you have saved by the age 30 – 35?
- Average net worth of a Canadian by age and province
- Average net worth of Canadians without their house
- Comparing net worths of Canadians
- Is talking about your net worth bragging?
- What is your personal finance score?
But what values do I enter?
Remember that grey area thing about cars, personal belongings and even your house?
My rule of thumb is as conservative as possible.
Why don’t I put the future values?
Future values are estimates. You need to put what you actually have.
Today, you may have an estimated $1M at retirement from your pension plan.
When you actually get there, you may have $3M. Or $500K. You can’t know for sure.
Put what you know. Put current, EXACT balances of what is actually in your accounts.
Homes = Municipal Value
It is very low, at around $608K. I could be really zealous and decide to figure out my current resale price value with a realtor, or some website online, but I’d rather not pad my net worth.
Car = Kelly Blue Book Value
When I had a car I paid $2000 for, I put $0 because it wasn’t worth anything for resale. Maybe $500. I just didn’t bother padding my net worth.
When I got my second car for $10K, I also put $0 because I could resell it for maybe $1800 but it was a small amount.
With my current car, I put the KBB at $100K (that is what it says), and I never plan on reselling it, but it is an asset and it is a car I COULD sell (I have asked at the dealership) and people are more than willing to buy.
Would they pay $100K? Yes. That is a nice conservative number and comparable to what other cars have sold at in my range in the past. As the years wane on, I will lower the KBB value to whatever it is, until it is under $20K and then I might just scrap it from my net worth completely.
I put $0. I can resell all my laptops and clothes, etc for at least $10K altogether. It is too low of a number to bother with, so I leave it at $0.