Calculation of your net worth

The first step to overcoming your financial obligations is to get a clear picture of your situation. How much debt do you have, how much money do you have, and is it enough to pay off what you owe? However, cash on hand isn't the only asset at your disposal.

What is net worth?

Do not confuse net worth with total assets, which do not account for debts. If you own an apartment worth one million zlotys but also have a mortgage for one million zlotys, your net worth is zero.

Net worth is simply the balance of all your assets against all your financial liabilities. And by "all," I mean everything you could realistically sell to turn into cash.

How do you calculate your net worth?

Calculate the current value of your assets. If you own an apartment, determine and record its market value, not the price you paid for it. What matters is the amount you could realistically liquidate your assets for today.

If you bought an apartment for 500,000 PLN, it is now worth 700,000 PLN, and you own a car bought for 100,000 PLN that is now worth 50,000 PLN, your net worth is 750,000 PLN, not 600,000 PLN. I hope that is clear.

When determining the price at which you could sell your apartment, consider factors such as the city, district, square footage, number of rooms, floor, and neighborhood. Compare the decor and finish standard based on photos. It is quite easy to set a price.

Of course, this is only an estimate, and a potential buyer will likely negotiate, so you might have to lower the price slightly. Don't worry about that at all. You aren't selling anything yet, and you might not have to at all. Right now, we are just assessing the severity of your situation and potential debt issues.

You can calculate the value of everything you currently own in a similar way. Just browse listings on one or more auction sites. In addition to real estate, check the prices of items you think you could sell—cars, furniture, electronics, jewelry, and anything else that comes to mind. However, don't waste time on items of very low value or things that are hard to sell. You might manage to get a few dozen zlotys for them, but it's not worth your time. Also, remember that prices must be realistic—to a buyer, your personal attachment to an item means nothing.

Add all your liquid assets to this, such as your checking account balance, savings deposits, foreign currency, stocks, and bonds.

You can do this on a simple sheet of paper, but I recommend using Excel, Google Sheets, or similar applications. This will allow you to create a clear table with automatic summation of all components. Next to it, create a second table containing all your debts.

From your total assets, you must subtract your liabilities, such as your mortgage, car lease, installment plans for home appliances, credit card debt, overdrafts, payday loans, government penalties, outstanding fines, etc. If your debt is higher than your accumulated assets, you are unfortunately in a situation that could lead to a major problem, though it doesn't necessarily have to.

Why should you monitor your net worth?

Although preparing a proper statement might take you a few hours, it is definitely worth doing for several reasons:

• You get to know your actual financial standing, which may differ significantly from what you imagined.
• Beyond just using your belongings, you begin to clearly see how much they cost you, and you become more acutely aware of the debt associated with them.
• As a result, you may change your approach and reduce the amount of funds spent on purchasing items that depreciate rapidly.
• Seeing the full scale of your debt is eye-opening and sparks a desire to clear that part of the table by paying off your liabilities.
• This is an objective summary. When you create another one, for example in two months, you will have no doubt whether your decisions were right and whether your actions have improved your financial standing.

What does your net worth say?

The result itself is not definitive; having the same net worth does not mean that two different people are in an identical or even similar situation. Beyond the result itself, what matters is its context and monitoring the changes.

Even if your net worth is zero or even negative, it doesn't necessarily have to be a bad sign. Perhaps you have just taken out a mortgage where the total cost exceeds the value of the apartment, but you have no trouble paying it off and are improving your result every month? Or maybe you run a business that generates regular income, but you had to lease equipment to get it started? Even though your net worth is negative, you are improving your situation. You could also be in the opposite position—your net worth is positive, but it is gradually decreasing.

Do not rely solely on the summary result. Beyond that, what also matters is a stable source of income, reducing debt, and ultimately increasing the value of your assets.