A higher salary or the start of a savings plan does not necessarily mean that your financial situation has improved. Even if your income increases, your actual wealth may not grow if your debt and expenses rise faster.
To assess your current financial situation objectively, you need to calculate not only your income but also the assets you own and the debts you owe. One of the most basic measures you can use is net worth.
Tracking your net worth regularly shows not just how much money you have earned, but how much you have actually kept. It also helps you understand how reducing debt or increasing savings has changed your overall financial position.
What Is Net Worth?
Net worth is the amount left after subtracting all your liabilities from all the assets you own.
Net Worth = Total Assets − Total Liabilities
For example, if your assets are currently worth 70 million won and you owe 40 million won, your net worth is 30 million won.
Conversely, if you have 30 million won in assets and 50 million won in liabilities, your net worth is negative 20 million won. This is known as negative net worth.
Net worth is different from cash flow, which shows the money coming in and going out during a month. Cash flow measures income and expenses over a period of time, while net worth shows your accumulated financial position at a specific point in time.
What Should Be Included as Assets?
Assets are items you currently own that can be assigned a monetary value.
Common examples of assets include:
- Cash and checking account balances
- Savings accounts and term deposits
- Investment assets such as stocks, bonds, and funds
- Pensions and retirement accounts
- Real estate such as homes and land
- Vehicles and other valuable possessions
- Refundable rental or lease deposits
- Money that you are reasonably certain to receive
When recording an asset, use the amount for which it could reasonably be sold today rather than its original purchase price.
For example, even if you purchased a car for 30 million won, it should be recorded as approximately 15 million won if that is its current value in the used-car market.
Future salary that you have not yet received or an uncertain inheritance should not be included in your current assets. Net worth should be calculated using assets you can verify today, not money you expect to receive in the future.
What Should Be Included as Liabilities?
Liabilities are amounts that you must repay to another person or financial institution.
Common examples of liabilities include:
- Outstanding mortgage balances
- Housing deposit loans and other rental-related loans
- Personal loans and balances used from lines of credit
- Auto financing and auto loans
- Student loans
- Unpaid credit card balances
- Money borrowed from family or friends
- Unpaid taxes and utility bills
A loan should be recorded using its current outstanding principal, not the amount originally borrowed or the monthly payment amount.
Regular living costs such as rent, phone bills, and insurance premiums are generally considered expenses rather than liabilities if they are not yet overdue. However, unpaid overdue amounts can be recorded as liabilities that must be repaid.
Step 1. Choose a Calculation Date
Net worth should be calculated as of a specific date because account balances, investment values, and loan balances continually change.
Choosing a consistent date, such as the last day of each month or quarter, makes it easier to compare your results with previous records.
If you are calculating household net worth, first decide which individually owned and jointly owned assets to include. It is important to apply the same standards consistently and avoid counting the same item twice.
Step 2. Record Every Asset at Its Current Value
Record all the assets you own, including cash, savings, investments, deposits, real estate, and vehicles.
Use the actual cash and account balances on the calculation date, and use the market value of stocks and funds on that date. For real estate and vehicles, it is better to use a conservative estimate based on a realistic market price rather than an overly optimistic value.
Trying to calculate the value of every household item, such as furniture, appliances, and clothing, can make the process unnecessarily complicated. You may exclude items with little resale value and focus on assets that have a meaningful effect on your financial position.
Step 3. Record the Outstanding Balance of Every Debt
Review each loan and credit card statement and record the amount you still owe as of the calculation date.
When organizing your debts, it is helpful to record the following information as well:
- Type of debt
- Current outstanding principal
- Interest rate
- Monthly payment
- Payment due date
- Expected payoff date
Recording the interest rate and repayment terms along with each debt makes it easier to decide which debt should be reduced first.
Step 4. Calculate Your Net Worth and Review Asset Liquidity
You can calculate your current net worth by subtracting your total liabilities from your total assets.
However, a high net worth does not necessarily mean that you have enough cash available for immediate use. If most of your assets are tied up in a home or retirement accounts that are difficult to access, you may struggle to cover an unexpected expense even with a high net worth.
It is therefore helpful to divide your assets into the following categories:
- Liquid assets: Cash, checking accounts, and short-term deposits
- Investment assets: Stocks, bonds, funds, and retirement accounts
- Physical assets: Real estate, vehicles, and other valuable possessions
Reviewing your liquid assets along with your net worth allows you to assess both your total wealth and your short-term financial security.
Step 5. Compare Previous Records and Decide What to Do Next
The purpose of calculating net worth is not simply to check the number once and forget about it. It is important to record it regularly using the same standards so that you can track the direction of change.
If your net worth has increased, determine whether the change came from increased savings, higher investment values, or reduced debt.
If your net worth has decreased, identify whether it was caused by a temporary decline in investment prices, new debt, or spending that exceeded your income.
You do not need to check the changes every day. Investment and real estate values can fluctuate over short periods, so comparisons made monthly, quarterly, or annually using the same standards are more useful.
Does Negative Net Worth Mean Financial Failure?
Having a negative net worth does not necessarily mean that you have failed financially.
People who have recently started their careers, have student loans, or borrowed money to buy a home may have more liabilities than assets for a period of time.
What matters more than a single current number is the direction in which your net worth is moving. If your debt is decreasing, your savings are growing, and your negative net worth is becoming smaller, your financial situation is improving.
Conversely, even if your net worth is positive, you should review your financial structure if your credit card and loan balances continue to grow or you do not have enough cash for emergencies.
Practical Ways to Increase Your Net Worth
The basic way to increase your net worth is to grow your assets and reduce your liabilities. However, instead of trying to do both as quickly as possible, set priorities that fit your current circumstances.
If you have high-interest debt, it is a good idea to determine which high-interest debt to pay off firstfirst. Reducing high-interest debt can lower your monthly expenses and free up more money for future savings.
It is difficult to reduce debt if every unexpected expense forces you to use a credit card or loan again. In this situation, use a method for calculating your emergency fund target based on living expensesto build a basic reserve of liquid assets first.
Once your debt and emergency fund are reasonably stable, you can continue saving and investing for the long term according to your financial goals and risk tolerance.
Net worth does not increase through investment returns alone. It grows through a combination of reducing unnecessary debt, keeping a portion of your income, and holding assets over time.
Common Mistakes When Calculating Net Worth
Using the Original Purchase Price to Value Assets
Vehicles, real estate, and investment assets should be valued using a reasonable current market value rather than their original purchase price.
Recording Only the Monthly Loan Payment as a Liability
For each debt, record the entire outstanding balance that you must repay, not just the amount due this month.
Including Income You Have Not Yet Received as an Asset
Future salary or uncertain income should be included as an asset only after you actually receive it.
Assuming Net Worth Is the Same as Available Cash
Even with a high net worth, you may have difficulty covering short-term expenses if your assets cannot be quickly converted into cash.
Comparing Your Net Worth with Someone Else’s
Because people differ in age, income, housing arrangements, family circumstances, and financial goals, simply comparing your net worth with someone else’s is not very meaningful. It is more useful to compare your current results with your own previous records and review the direction of improvement.
Net Worth Checklist
- Have you chosen a calculation date?
- Have you recorded your assets at their current value?
- Have you included the outstanding balances of all loans and credit cards?
- Have you avoided counting the same asset or liability twice?
- Have you separated liquid assets from long-term assets?
- Have you compared the results with previous records and identified the causes of any changes?
- Have you set a specific goal to work on before your next review?
Net worth is not the only measure of your financial situation. You should also consider income stability, monthly cash flow, emergency savings, and insurance coverage.
However, simply listing your assets and liabilities in the same statement can give you a much clearer understanding of where you stand and what needs to improve.
Do not be discouraged if your first net worth calculation is lower than expected or even negative. What matters is facing the number honestly and continuing to move toward reducing debt and building assets.
References
U.S. Securities and Exchange Commission, Figure Out Your Finances
Consumer Financial Protection Bureau, Your Money, Your Goals Toolkit