Listing what you own and owe
Pick one date and gather statements for it. Under assets, enter cash, investments, retirement accounts, your home at a realistic sale price, vehicles at resale value and anything else you could actually sell.
Under liabilities, enter the balance you owe today on your mortgage, auto loans, student loans, credit cards and anything else. Use the current balance and not the original loan amount. Leave out future bills like next month's rent, because those are expenses and not debts.
The arithmetic behind net worth
Net worth is total assets minus total liabilities: what you own minus what you owe. The debt-to-asset ratio divides total liabilities by total assets and shows the result as a percentage. It tells you how much of what you own is effectively financed by borrowing. If you enter debts but no assets, the ratio cannot be calculated and the tool says so.
Example: a homeowner with $555,000 in assets
Suppose you hold $15,000 in cash, $30,000 in investments, $85,000 in retirement accounts, a $400,000 home, $20,000 in vehicles and $5,000 of other assets. You owe $280,000 on the mortgage, $12,000 on a car, $18,000 in student loans and $3,000 on credit cards.
Total assets are $555,000.00 and total liabilities are $313,000.00, so net worth is $242,000.00. The debt-to-asset ratio is 56.40%.
Take out the home and mortgage, and assets fall to $155,000.00 against liabilities of $33,000.00. Net worth is then $122,000.00 and the ratio is 21.29%. Almost half of this person's net worth is home equity, which they can only reach by selling or borrowing.
What the result says about you
Direction matters more than any single figure, so recalculate on the same date each year. A negative number is not a verdict. Student loans and few assets can produce one early in a career, and paying down debt moves it up steadily.
Blind spots in the total
Net worth flatters some assets and ignores others:
- A 401(k) or RRSP balance is before tax, so you will keep less than the number shown.
- Selling a home has costs, and vehicles lose value every year.
- A workplace pension may be valuable yet have no balance to enter.
- Money owed to you, such as a loan to a relative, counts only if you expect to collect it.