How to Calculate Your Personal Net Worth and Then Improve It

The most recent Office for National Statistics data on average UK household median net worth, published in 2014, put the figure at £225,100.

For those curious as to what their net worth really is, we’ll take a look here at how it is officially calculated.

However, while there is nothing wrong with idle curiosity, the real value in methodically calculating net worth is in providing a reference point – the first step to taking action to improving it and achieving financial goals!

So, how much are you or your household really worth and what simple steps can be taken to boost that in the pursuit of long term financial security?

How to Calculate Your Net Worth

Calculating personal net worth is not a particularly complex formula.

It’s really just a case of an individual adding up the value of everything owned and then subtracting everything owed.

While a simple exercise, properly calculating net worth is valuable in the sense that most of us have a natural inclination to sweep debts under the mental carpet and focus on our assets when assessing financial stability.

This leads to a rosier picture than the reality and can lead to putting off belt-tightening and increasing savings levels to what is necessary to secure our financial future.

For an accurate net worth picture, add up all assets as per a realistic (not too optimistic or overly conservative) valuation of worth. Typical assets to include would be:

  • Cash in all bank accounts held
  • Current value of any investment accounts
  • Market value of any property owned
  • Car(s) (check the going rate for closely comparable vehicles online)
  • Valuables such as jewelry, art, furniture with any significant resale value (again reference prices of realistic equivalents online)
  • Cash value of insurance polices
  • Business interests (this can be more complex but use conservative and accepted business valuation methodologies)

Then calculate the total value of all liabilities, with the emphasis on all:

  • Mortgage
  • Car loan
  • Credit card balance
  • Any other loans eg. outstanding student debt

Subtract the total value of liabilities from the total value of assets and you will have an accurate picture of net worth.

Get the Net Worth Worksheet

Need help? We have modified Deep Dish‘s net worth tracker with fictional UK-centric information to help get you started.

This can help you to track your net worth on a monthly basis. To use, just copy this spreadsheet to your own Google Drive and fill in your own details.

 

 

What is a Healthy Net Worth?

The point of a net worth statement, other than providing quiet satisfaction if you are lucky enough to be particularly wealthy, is to track progress towards realising the target level required to provide comfort later in life, be able to cover expected expenses such as university costs for children and/or allow retirement.

Calculating such a figure and tracking it has also helped people get out of debt and managing their wealth correctly over time.

Creating a net worth balance sheet and updating it each month will help keep you on track. It can even put you on the way to being able to save £100,000 by age 25.

The net worth target should be what has been calculated as the sum required to provide a comfortable income over retirement and to cover any other major expenses expected in the future.

A typical net worth model will see it continually growing during accumulation years pre-retirement and then gradually decreasing during the de-cumulation years of retirement as you enjoy the fruits of your labour.

Improving Net Worth

Keeping a comprehensive net worth balance sheet up to date provides a good overview of assets, which will show which are working in favour of net worth, which aren’t and what might be improved.

It might turn out an investment property is only providing an income of 2% after all taxes and other expenses are deducted while investments in a SIPP are returning an average of 5%.

That is a valuable insight that could lead to a more effective distribution of asset allocation going forward.

A net worth balance sheet may also help to show over-exposure to one asset class. Many in the UK have an over-reliance on cash investments.

For example, a net worth of £600,000 may have been calculated as required to provide a comfortable income in retirement.

You may have a net worth of £600,000 but if £450,000 of it is tied up in the family home that highlights a problem. The home provides a roof over your head but not an income.

If too large a portion of net worth is locked up in assets that won’t provide an income then understanding this will help towards effective future planning.

An example of this would be the realisation the property may need to be sold at some point and exchanged for a less expensive alternative, freeing up net worth value to be allocated to income-generating assets.

In any financial planning, the key is awareness of what the current situation is, how it might need to be improved and then taking the necessary steps in that direction.

So, don’t delay, put your net worth balance sheet together today and then diligently keep it up-to-date!

Keeping a close eye on net worth will help prevent financial ‘drifting’, which could make all the difference in the long term.

John Adam

John Adam co-founded iNVEZZ.com, a news, analysis and comparison portal for retail investors. iNVEZZ was acquired by Investoo in 2017.