Calculation of your net worth

The first step to overcoming your liabilities is thorough understanding of your situation. How much debt do I have, how much money do I have, and will it be enough to pay off my debt? However, cash in hand is not all you have at your disposal.

What is net worth?

Do not confuse net value with net worth, which does not include debts. If you own an apartment worth one million, and also have a mortgage of one million, your net worth is zero.

Net worth is nothing more than the combination of all assets held with all financial liabilities held. And by everything, I mean everything you are able to sell to get the cash equivalent for it.

How do you count the net worth of your assets?

Calculate the value of the assets at the present time. If you own a home, determine and record its market value, not the price you bought it for. What matters are the amounts at which you can realistically liquidate your assets today.

If you bought an apartment for 500,000 zlotys and it is now worth 700,000 zlotys, and you have a car that was bought for 100,000 zlotys, but is worth 50,000 zlotys today, your net worth is 750,000 zlotys, not 600,000. I hope that is clear to you.

When determining the price for which you are able to sell your apartment, take into account criteria such as: city, neighborhood, square footage, number of rooms, floor, surroundings. From the photos, compare the decor and standard of finishing. It’s very easy to set a price.

Of course, this is only an approximate amount, and a potential buyer will probably haggle and you may have to come down slightly on the price. Don’t worry about it at all. You’re not selling anything yet, and you may not need to do so at all. Right now, we are trying to determine the level of seriousness of the situation and potential debt problems.

In a similar way, you can calculate the value of anything you currently own. All you have to do is browse the adverts and offers on one or more auction sites. In addition to real estate, check the prices of items you think you can sell – cars, furniture, electronics, jewelry and whatever else comes to mind. However, don’t waste your time on things of very low value or those that are hard to sell. Maybe you could collect a few dozen zlotys for them, but it’s a waste of your time. Also, remember to keep your prices realistic — to a buyer, your personal attachment to an item means nothing.

Add to everything also ordinary cash like your current account balance, deposits, foreign currencies held, stocks, bonds.

You can do this on a regular sheet of paper, but I recommend you use a spreadsheet in Excel, Google or similar applications. This will create a clear table with automatic summing of all components. Next to it, make a second table that will contain all your debts.

You still have to subtract your liabilities from your wealth, i.e. mortgage, car leasing, home appliance installments, credit card debt, overdraft, instant loans, fines, overdue fines, etc. If your debt is higher than your accumulated assets, then unfortunately you are in a situation that could lead to a potentially big problem, although it doesn’t have to at all.

Why monitor net worth?

While it may even take you a few hours to put together a decent list, it’s definitely worth it for a few reasons:

• You get to know your actual financial situation, which may strongly differ from your perceptions.
• In addition to using your things, you begin to see clearly how much they cost you, and you remember the associated debt more strongly.
• As a result, you can change your approach and reduce the amount of money you spend on purchasing items that are losing a lot of value.
• Knowing the full extent of your debt opens your eyes and sparks a desire to clear that part of the table by paying off your obligations.
• This is an objective summary. When you do another one in, say, two months, you have no doubt that your decisions were right and your actions improved your finances.

What does your net worth say?

The result alone does not determine anything, and the same net worth of two different people does not mean that those people are in identical or even similar situations. Beyond the result itself, what matters is its context and keeping track of changes.

Even if your net worth is zero or even in the negative, it doesn’t have to be a bad sign. Perhaps you just took out a mortgage whose total cost exceeds the value of your home, but you have no problem making the payments and improving your result every month? Or perhaps you run a business that generates regular revenue, but you had to lease equipment to run it? Even though your net worth is in the negative, you are improving the situation. Or you may be in the opposite position — your net worth is in the positive, but gradually declining.

Don’t be guided by the result of the statement only. In addition to it, a stable source of income, reducing debt and ultimately increasing the value of one’s assets still matters.