Essentially your net worth is the value of what you own minus how much you owe.
If you had £10,000 sitting in your bank account, would you feel wealthy? What if you had £10,000 cash in the bank but you also had £20,000 owing on credit cards and loans?
Although you might feel rich, the reality would be that your finances are not as healthy as they seem. This is what net worth shows.
It gives you a truer picture of your financial health than just looking at your bank balance.
That's because it is calculated by adding up your assets (the things you own) and then subtracting your liabilities (the things you owe).
How do I work out my net worth?
To calculate your net worth, you can use a spreadsheet or you can simply draw two columns on a piece of paper. Dig out your most recent financial statements to make sure your figures are up to date.
Draw two columns;
In column A, you list your assets. This should include the money in your current account, cash savings, the equity in your home (meaning the current market value of the property less the outstanding mortgage), any workplace or personal pensions, any investments you hold, your car, and you can even include valuable heirlooms or jewellery.
In column B, you list your liabilities. This will include credit cards, loans including student loans, any car finance still owing, store cards or money owed to friends or family. Your net worth is the total of column A minus the total of column B.
Hopefully, the number you end up with will be positive, but what if it's not?
In the example above, the person with £10,000 in savings and £20,000 in debts actually has a negative net worth of £10,000. If your net worth is negative, do you understand the reason why? Perhaps you have large student loans outstanding, or a hefty mortgage, in which case you probably also have a plan and a timescale in mind to pay these off.
But if the reason is a lot of outstanding credit card balances, for example, think about what you can do to tip the balance back into your favour. It will almost always make sense to use your savings to pay off any debts. The reason for this is that the interest you'll pay on consumer debt like credit cards, loans and car finance will be much higher than the interest you will earn on your savings.
The exception could be if you have shifted your debt to an interest-free credit card using a balance transfer deal and you know you can pay it off before the rate goes up.
Another might be that you want to keep an emergency fund in cash, although there is also a school of thought that says your debt is an emergency and should be dealt with first. If you're not sure where to start then read our tips for how to prioritise your debt.
Keeping track of your net worth
Tracking your net worth from month to month is a great way to see the progress you are making towards your financial goals.
If that number keeps going up, you are making sensible financial decisions which will benefit your future. If it's going down, or the number is negative, it's time to take action.
Our articles cover a wide range of mainstream financial products and employee benefits. Terms and conditions of each product may vary depending on your provider. Please ensure you check the specific terms and conditions of any financial products and employee benefits available to you from your employer.