The term “net worth” is not reserved for rap moguls, tech entrepreneurs, and Google’s auto fill. Everyone has a net worth. In fact, your net worth is an important metric on your personal financial journey.

Your net worth is the value of your assets minus your liabilities; what you OWN minus what you OWE.

Net Worth = Assets – Liabilities

An asset is anything you own that has value; your home, your car, your 401(k) and other investment accounts, that baseball card collection, and, of course, cash. While you were sure it would be worth WAY more by now than it is, even that Beanie Baby collection you’re embarrassed to admit you own is an asset.

Liabilities are your debts. Debts include the balances on your mortgage, home equity loans, car loans, credit cards, personal loans, 401(k) loans, and payday loans.

To calculate your net worth, add up the value of your assets. Add up the balances of your debt. Then subtract the debt balance from the total asset value.

Make a simple Excel template or find a net worth template on-line.

OK, you’ve done the math and you’ve got your net worth. Now what? Use it to make decisions, of course!

Your net worth is a measure of the wealth you have built or accumulated. Building wealth is not a goal in itself, however. Your net worth only matters against a backdrop of goals. Most people are building wealth with retirement in mind. Some are building wealth to put kids or grandkids through college. And still others are dreaming of that beach house on Bolivar Peninsula. What are your goals? How long do you have to build the wealth necessary to achieve them? The answers to these questions will tell you where your net worth needs to be.

If your net worth is negative, it means the balance of your debts is greater than the value of your assets. Put another way, if you were to liquidate everything you owned to pay off your debts, you would come up short.

Conversely, if your net worth is positive, it means the value of your assets is greater than the balance of your debts. You have created wealth.

Do not confuse net worth with self worth. There is no judgment or comparisons when it comes to calculating your net worth. There are many reasons why you may have a small or negative net worth. Perhaps you moved cities for a job and had to purchase a home at the height of a housing bubble and you now owe more on the house than it’s worth. Sit tight. The combination of your monthly mortgage payments and the turnaround in the housing market that always comes will correct this. Maybe you experienced a medical emergency that your health insurance didn’t completely cover and you didn’t have the cash to pay immediately. Be thankful medical services were there when you needed them!

If your net worth isn’t where you think it should be, rather than a source of judgment, it should simply be motivation, a call to action, to begin being more intentional with your money.

As the net worth equation suggests, there are two ways to increase your net worth; increase assets or decrease liabilities. Liabilities negatively impact your net worth in two ways. First, they directly reduce your net worth (net worth = assets – liabilities). Second, the monthly payments decrease the cash available to invest in appreciating assets. So, the most effective way to begin to increase your net worth is to develop a strategy to eliminate debt.

In January, we talked about monthly budgeting. A monthly budget is like your personal income statement. The income statement starts with your revenue (your salary) and then all of your expenses are subtracted. What’s left after expenses each month, your profit, is then available to give, save, and invest. This month we are talking about your net worth. By listing your assets and your liabilities, you have created your own personal balance sheet. If you are making use of these two tools, the monthly budget (income statement) and your net worth (balance sheet), you are beginning to handle your personal finances like a business. You are now the CEO of Your Life, Inc.! You know things about your life; what you earn, what you spend, what you own, what you owe. This gives you data with which to make informed decisions. You can review your balance sheet and previous months’ income statements to find ways to improve your financial position.

These two documents are a powerful combination.  Want to increase your net worth? You’ll need to dive into your income statement to find ways to cut expenses to increase your profit which can then be applied to your debt balances. Voila! You have increased your net worth through financial statement analysis!

Your net worth serves as a mile marker on your personal financial journey. Check it a couple of times each year to ensure you are headed in the right direction.  Net worth is such an important metric that I named my personal financial coaching business “The Net Worth Project”; “Net Worth” for the importance of this metric in your personal finances and “Project” because amassing a sufficient net worth doesn’t just happen. It requires effort, discipline and focus…it’s a project.