How to calculate your net worth?

Most people who have a blog related to FI (Financial Independence), the FIRE movement or simply on all topics related to personal finance, like to publish personal information such as their salary, passive income, savings rate or wealth. I admit that as I write this, I don’t feel ready to publish this kind of information yet, but I think about it regularly.

Anyway, before publishing some numbers, I find more interesting and important to understand how these numbers are calculated. This post is therefore dedicated to the calculation of Net Worth

Why should we know this value?

This value will allow you to have a global view of your financial assets. It is a fundamental measurement tool of your finances! However, it is often complicated to know this value, because your assets and debts are often represented through different platforms. Think of your main e-banking where you receive your salary, your different savings accounts, your pension fund, pillars 3a, 3b, your possible stock market investments or in cryptomoney…

Having these numbers scattered all over the place makes the task of tracking the Net Worth a bit daunting at first, but the calculation is still very simple. There are however a few subtleties to take into account in order to build your calculator correctly.

This value is not only used to say “I’m rich, I’m not rich”, but its calculation will allow you to identify how it is composed. The composition of the Net Worth is very useful to analyze the distribution of your property (assets) and debts (liabilities). This analysis will be an essential indicator for your investments.

How to calculate your Net Worth?

The formula is easy.

Your Net Worth is the sum of your assets (the things you own) minus the sum of your liabilities (your debts, payment obligations, etc.).

So you have two parts to calculate:

  • Your assets
  • Your debts

I will explain in detail how to calculate these two categories. You’ll be surprised to see that your Net Worth will be very different from what you might expect.

Calculate your assets (what you own)

This part is probably the most interesting, because it will allow you to know the value of what you have. Here is a non-exhaustive list of what you should consider: 

  • The cash
  • Retirement savings accounts
  • The real estate
  • Enterprises
  • Life Insurances
  • Inheritance
  • Investments
  • Other valuable assets

At this point, many people never imagined they would have to consider all of these elements in their wealth! I’ll go into more detail on each of the items listed above.

1. The cash

This item is the most obvious for many people and often the easiest to calculate. It includes all of your bank accounts and possibly the cash you might have in a safe at home or in a bank. In this category, we will only include money that is directly available without withdrawal conditions (3a for example). You will therefore have to go through your various e-banking, savings statements that you never touch, etc.

Personally, my YNAB budgeting tool allows me to have these values at all times. I actually have all of my current and tracking accounts there.

2. Retirement savings accounts

We are talking about retirement accounts. In Switzerland, it is our famous 2nd and 3rd pillars. In the United States, Canada, they speak about accounts 401 (K) et IRA.

Having exchanged quite a bit on this subject, some people do not include this category in the calculation. Personally, I think this is a mistake, because it is money that you own and that belongs to you, but that you can only touch under certain conditions.

Since the amounts are often quite large, I advise you to take them into account in your calculation, as they are really a source of value. It’s up to you to make up your own mind on the matter; you are free to include them or not. To help you in your choice, here are some arguments and lines of thought:

2nd pillar: you cannot draw it until you retire (at the earliest at age 58). Depending on the evolution, it is also possible that the withdrawal in capital will no longer be possible, but only in the form of an pension. Despite these possibilities, it is still your money. Whether you opt for a lump sum or an pension when you retire, you will receive money, so you should include this in your retirement plan.

To know this value, you will receive a second pillar statement or report at least once a year. Some institutions also offer online access at any time. These reports contain many values. Personally, I use the value that indicates the actual capital I have. In my case, this value is shown under “Vested benefits” or under “Current retirement assets“.

3rd pillar: on this pillar, you know at all times how much it is worth. It is a so-called “personal” pillar which is optional. Depending on your contract and the institution where you make the payments, the amount and the conditions of withdrawal will be different. However, it remains a personal asset that you should include in your calculation.

Personally, my goal is to have a Net Worth representing the complete picture of my assets at a given moment. That’s why I include these two pillars. However, I do take them into account when analyzing the composition of my Net Worth.

1st pillar (AVS): this is the social security of Switzerland. As it is not possible to know how much you will receive at retirement with this pillar, I do not include it in the calculation of the assets. In some countries, this amount is a lump sum. In this case, I think I will include it in the calculation.

3. The real estates

Your real estate assets are obviously included in this category! It is rare to own a property without having a mortgage on it. The property is therefore composed of a debt. Since we are in the assets section, we will only focus on the market value of the property. I still recommend to be quite careful about the evaluation of its value. I advise you to do a few free online estimates and eventually to call upon a professional who will first give you a free evaluation and then a more thorough evaluation for a fee. I advise to have your property evaluated every 5 years. 

When a property has been evaluated, I personally deduct about 5% of its value. This 5% represents approximately the various fees that apply following a sale of the property. If you sell a property without reinvesting in a new purchase within two years of the sale, you will be taxed on the profit from the sale. Depending on your situation, it is up to you to see how you manage this in your calculation.

4. The enterprises

The true value of a business is very difficult to estimate. If you own or co-own a business, it is wise to have it valued by experts. This category also includes possible investments in businesses. As I am not in this situation, I cannot advise you further on this section.

5. The life insurances

Many people have one or more life insurance policies. There are different types of policies:

  • Term life insurance / pure risk: the money is distributed only in case of death to the beneficiary. It should not be included in your calculation.
  • Tied life insurance: contract linked to a pillar 3a. The capital (part of it) can be drawn upon retirement. I therefore advise to include it in the calculation.

In the case of tied life insurance, you must be careful to find the right amount to use in your calculation because the amount of your premiums is divided between:

  • The life insurance portion (coverage of the risk of death, disability, loss of earnings)
  • Savings part (your capital 3a)

Most insurance companies offer a customer portal that allows you to see the projected value. Since the term of the contract is often too far in the future, this value will never be guaranteed. I recommend that you ask your advisor to explain the details of your insurance policy and then to know what amount to use in your calculation.

6. Inheritances

I don’t recommend including them in the calculation, because they are often uncertain amounts and you don’t know when you will get them. After talking to a lot of people, I was surprised to see how much this value counts in the calculation of their Net Worth. It is important to make your own opinion on this. 

I guess there are cases where it would make sense to include this value. If, for example, it’s an advance on an inheritance of a known amount, you should include it. Some people want to take only a portion of what they should get. I have seen examples of people dividing the amount by Pi (3.14) but I did not understand the reason for choosing this value. Even if you choose to include only a percentage of a value, you can never know when you will receive that inheritance. 

If you know that you are going to inherit a property, the calculation is even more complicated, because you still don’t know when you will receive it, you don’t necessarily know the value of the current property and you won’t be able to find an adequate formula to extrapolate the price of the current property over 10, 20 or 30 years. I therefore advise you not to count this type of inheritance in your calculation.

7. The investments

Any capital invested in the stock market must be taken into account in the calculation. We are talking about the following elements:

  • Cash in brokerage account
  • Stocks
  • Bonds
  • P2P landing
  • Crypto

Except for the P2P loan, the money is in principle available if you sell the asset (share, bond, etc.). In the calculation, I advise you to pay attention to two things:

  • Currencies of each investment: applies a conservative conversion rate.
  • Possible sale / currency conversion fees.

Personally, I centralize these different “accounts” in my budgeting tool and update the value each month.

8. Other valuable assets

This category includes all the other assets you could sell! In order to decide whether to include a particular asset, I suggest you answer the following questions:

  • Is the value of the property easy to estimate (comparator?)?
  • Is the item rare?
  • Is the item wanted?
  • Does the value of the item have a significant value in relation to your net worth?

If you can answer “yes” to all of these questions, you should consider including this item in your calculation. Personally, I don’t include anything. Some people include their car. This can be interesting for collector vehicles that increase in value over the years. 

Collectors may have valuable assets as well (stamps, books, coins, paintings, historical posters, etc.). 

In general, you should be very careful about estimating these goods. Don’t let your emotional side set the price.

Calculate your liabilities (what you have to pay or refund)

Regarding liabilities, this includes everything you have borrowed from others. To put it simply, as soon as you owe money to someone, you count it as a liability. Ideally, in Switzerland, for anyone who cares about their personal finances, the only debt allowed should be the mortgage.

1. Consumer debts

I start with the most harmful category! All consumer loans or credit should be banned! The most common loan in Switzerland is the car leasing. In other words, if you have a leased car, the car is not yours! I’m not blaming you, because I myself had a leased car that I’m trying to get rid of at all costs

You can also include in this category, all leases on household furniture, electronics or other goods. Anyone concerned about personal finances should never have a loan for a consumer good. If you don’t have the money to own something, don’t buy it! This is also true for the so called offers payable in x number of times without fees. A TV for CHF 2’000.00 payable in 12 payments without fees is not yours! At the time of the signature of such a contract, after having paid the first monthly instalment of 167.00 CHF, you have a debt of 1’833.00 CHF that you must count in your calculation.

2. The mortgages

This is the most common liability in Switzerland. We will say that it is a “normal” debt for any owner. Very few owners actually own their house, because as long as you have this debt, the property belongs to your bank or insurance company with whom you have concluded the mortgage contract. 

I don’t consider mortgage debt to be a bad thing in the sense that : 

  • Mainly low-interest debt.
  • Being a homeowner instead of a renter can potentially cost you less. (a whole topic!)
  • Having a mortgage debt often brings a tax advantage.

However, as you approach retirement, it may be advantageous to reduce this debt.

3. Credit cards

Using a credit card has many advantages, especially thanks to the cash-back offered by some establishments. However, I advise you to always pay your bills on time! If you don’t pay your bills on time, you’ll end up with credit card debt and a huge interest rate!

I’m not personally a big fan of credit cards, but I think it’s still a good idea to include it as a liability, because until you pay it off, it’s a debt you own.

4. Education loans

This practice is not very common in Switzerland, because access to higher education is very cheap in Switzerland. It is very common in the United States. However, if you had to take out a loan to finance your education, you should include it in your liabilities.

5. The private debts

Any money you have to pay back to someone should be included in your liabilities. This can be a family member, friend or P2P lender. In the latter case, pay attention to the possible interest concluded on the loan. The amount used must include the interest.

Proceed to calculation

Once you have collected all this information, you can finally move on to the most expected moment, the calculation! As already explained, nothing very complicated here:

Net Worth = Sum of your assetsSum of your liabilities

If you have a negative amount, I advise you to write me quickly 🙂 In principle, this should not happen.

Follow the evolution

Once you have collected the data for the first time, the hardest part is done! All you have to do now is to be rigorous and take 30 minutes per month to calculate your Net Worth and to record all these values in order to follow the evolution. You really need to consider this value as a powerful measurement tool! It will allow you to validate that all the investments, efforts and other optimizations you make on a daily basis are beneficial.

There are several ways to calculate this value over time. The most common way is to use an Excel sheet and insert your values. There are many sheets available on the Internet. Personally, I always advise to make the effort to make your own Excel sheet at first in order to force yourself to really understand what you are doing. If later on, you want more features and details, it is always possible to use more advanced tools.

My home-made calculator!

With my friend Arturo Fich, we have developed a Google Sheet that allows you to track and analyze your Net-Worth. We chose a Google Sheet in order to have a portable version of this tool. It is important that you make a copy of this file (File -> Create a copy) so you can edit it with your own numbers 🙂

Don’t hesitate to tell me about your experience with our sheet and especially to tell us if you have ideas for improvement or if you have discovered a bug.

Have fun !

Conclusion

Calculating this value is not at all complicated and just takes a little time the first time to gather all the information. Keeping track of this indicator is essential for anyone who is serious about personal expenses. Obviously, it must grow over time and it is necessary to know its composition in order to make adjustments to improve its growth.

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