QUESTION: How to account for debts in net worth?

Accounting for debt obligations in the calculation of net worth is an important tool for an objective assessment of your financial health. Net worth is calculated using a simple formula according to which all accumulated debts and obligations are subtracted from the total value of all your available assets. Assets include cash savings, bank deposits, investments, real estate, and valuable property, while liabilities include mortgages, car loans, consumer loans, and debts to acquaintances.

Regular tracking of this indicator helps you see real progress on the path to financial independence, even if you currently have very little free cash in your bank accounts. When you pay off a mortgage or a consumer loan, the size of your liabilities decreases, and your net worth automatically grows, even if the value of your property remains the same.

Maintaining such records allows you to notice alarming trends in time, for example, a situation where the debt burden is growing faster than the value of assets. Practice shows that compiling a monthly report on your own capital disciplines a person, forces them to take a more conscious approach to new expenses, and clearly demonstrates the results of long-term financial planning. You can see in figures how each early repaid loan brings you closer to a positive and stable financial balance.