How to Calculate Your Net Worth and why it is a good indicator of financial health

Share this post

How to Calculate Your Net Worth and why it is a good indicator of financial healthEssentially knowing HOW to calculate your net worth as an individual is just as important as any business.

Net worth is simply a personal balance sheet; the difference found by subtracting your liabilities from your assets.
In other words, what you own minus what you owe.
It shows us exactly how “financially healthy” we are, and just how long we can progress with our current spending and saving habits.
In this post, let me break down how to do this in a simple way on Excel in this video below, helping you to lay the foundation for your own Net Worth calculation every few months – your Profit and Loss sheet for your household if you will – and help you to categorise each of the main areas of your life to consider.
Why net worth very much acts like your own indicator of personal wealth and health overall is that it provides good insight into how you are managing your money every month and how you are spending the income that comes your way.
Total household Income really doesn’t mean anything in terms of how wealthy or rich you are and the options available to you if you are spending more than you earn and owe the bank or credit card companies more than you can pay off every year.
That is why it is one of the best indicators to track every 3-6 months within your own life, and keep track of to motivate you.
Disregard the need to minimise your spending within your food budget or electricity bill if you simply are over your head in liabilities that really would be better paid off with some money instead.
The key concept really for Net worth is basically how much cash you have immediate or somewhat immediate access to in your name if you required it.
So just how do we calculate this important number?
You can follow along with the key concepts of Net worth and the calculation on my Youtube channel video here:

Like the look of my Autopilot Money Spreadsheet, you can pick up a copy in my Store section of this website or on Etsy below:

How to calculate household net worth

We need to break down first of all the main items we own or owe money currently to someone else for as two value types – Assets and Liabilities.

Money Making Assets are any item that we have purchase or own that increase their value over time compared to what we paid for it.

They have a significant ongoing cash value in our life right now and expected in the future.

This would include but not exclusively:

  • Current value of your Investments;
  • Your employer or private Pensions;
  • All Cash you hold in banking accounts;
  • Current market value of your home and transportion/cars;
  • items of significant value such as jewellery.
  • If you wanted to include a rough estimate for the contents of your home, then this could be included here too but realise that the cash value of your items on resale would be much smaller usually than you think.

On the other side, the items then that detract from our net worth would be liabilities.

These include and not exclusive to:

  • All bank debts due,
  • Mortgage amount still outstanding,
  • All Consumer Credit card debt due,
  • Outstanding student loans balance (technically in UK).

The Net Worth personally would then be calculated by:

Assets – Liabilities = Personal Net Worth

How much should my net worth be by age

By age 30, the estimated amount regarded as a good net worth amount to aim for would be half your salary, so if the UK average salary is £25k then £12.5k in positive net worth would allow you to be in a good standing financially.
By your 40s having double your salary is the suggested amount for a good Net Worth indicator, so that same £25k becomes £50k overall Net worth.
By 50, aiming for roughly four times your salary would be recommended, although the average for most people in the UK is closer to twice at that age(which isn’t enough if that is to use as a pension or retirement pot potentially).
Ideally regardless of your age right now, when you retire you should be aiming for ten times your salary allowing for that potentially income that is around 50-75% of what you used to receive.
Reason for less than your present salary as your yearly income in retirement is by then hopefully you would not have the same money requirements for a mortgage/financial commitments for kids etc and loans are paid off in full.

How to improve your net worth quickly?

Two ways to look at this problem really and that is we can either increase the assets or decrease liabilities very much like a budget with income vs outcome.

Personally I find it easier to increase my assets (items that we own that give us added value as in life you can only stripe so much away before it becomes painful.

However with net worth, the net worth detractors actually are all mainly areas that if we free up that money we actually shouldn’t cause too much hard ship (isn’t food/fun/petrol money or giving up our job).

  1. Look at increasing your savings rate – how to save money fast video
  2. 10% rule/Snowball/Avalanche rule for any debt – make a debt plan – Link to my Pay off Debt quickly video
  3. With mortgage look out for the cheapest deals (main source of liability usually)
  4. Maximise your pension contributions with employer (free top ups ) or start your own SIPP particularly if high tax payer.
  5. Every pay day make it automatic to investments and savings – make it a goal to work on this number. it will drive all your financial goals and even a 0.1% progress is still progress.
I always believe seeing how someone else manages their money can be of great motivation and help, and if you would like to see how my family manages our money why not check out some of my other posts here:

Leave a comment

Your email address will not be published.