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This article is for educational purposes and does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.
According to Schwab’s Modern Wealth Survey in 2022, surveyed Americans said it would take an average net worth of $774,000 to feel financially comfortable and an average net worth of $2.2 million to feel financially wealthy.
As a business owner you may feel comfortable assessing your company’s value, but when it comes to your own financial planning, calculating your net worth can be a good place to start. Having a better grasp of your holistic finances can help you make better decisions not only for yourself, but for your business as you move forward.
Calculating Net Worth
You can calculate your net worth in a way similar to how you would calculate the value of your company. When you use a balance sheet, you subtract liabilities from your assets resulting in your equity. Before using the formula below, add up all of your assets and liabilities as best you can.
When it comes to calculating your net worth you use the following formula:
Assets – Liabilities = Net Worth
If assets are higher than liabilities, you have a positive net worth and an indication you are in good financial health. If you have more liabilities or debts than assets, your net worth could be in a vulnerable situation.
Organizing Your Financials
When calculating your net worth you’ll want to make a list of your assets and a list of your liabilities — either yourself or with the help of a financial professional. One way to think about assets and liabilities is that assets are things you own while liabilities are things you owe. Below are a few examples of what assets and liabilities might look like for calculating your net worth.
Examples of assets:
- Checking account
- Retirement account
- Savings account
- Real estate
- Personal property such as jewelry or art
Examples of liabilities:
- Personal loans
- Student loans
- Auto loans
- Credit card
- Line of credit
- Unpaid taxes
Updating Your Net Worth
There is no set time you need to update your net worth, but calculating it on a regular interval, whether that is quarterly or annually, can help you keep track of any changes. Consider also calculating your net worth after a large purchase, like a home or a car. Your net worth can grow or shrink over time, so depending on the assets and liabilities you have, keeping tabs on these changes can help you make better informed decisions. There are resources like AARP’s net worth calculator that can give you a very quick look at your net worth if you’re looking for a starting-off point.
Benefits of Knowing Your Net Worth
Your net worth and business often overlap, so it’s good practice to keep your business and personal finances separate in order to better manage your cash flow as well as your company’s. If you own your business, knowing both your net worth and the value of the company are critical to understanding your overall financial health. Knowing your net worth can help you make decisions related to your business. By having an understanding of the health of your net worth you may be able to make the following business decisions in a more informed way:
Funding your business: If you have a positive net worth, you may want to consider bootstrapping or funding your business yourself rather than taking on outside investors or a loan. If you take on outside financing, a lender would typically factor your business’s value or net worth into eligibility for that loan.
How much risk you can take: Much like having savings for your business, knowing how much you have to fall back on can help you determine how much risk you can afford to take with your business. For example, a negative net worth could be a signal to reinvest in your business by paying off debts or taxes rather than looking at purchasing new equipment.
How to pay yourself: Understanding your net worth can help you determine how you pay yourself as a business owner.
Planning for retirement: Having a sense of your financial health can help you plan for the future, including retirement. If your net worth is positive, you may think about increasing your retirement contributions. Depending on your current and projected net worth, you might be able to reach your retirement goals more quickly.
You can always make an assessment of your financial health and your business’ to make decisions on how to scale your company. However, you might also consider a financial professional or consultant to help manage your business or personal finances.