When it comes to financial health measures, there are not many numbers more important than your net worth. It’s not just a fancy number reserved for the super-rich; it is a practical tool that anyone can use to take control of their finances. By understanding your net worth, you have a clear picture of where you stand financially and get ideas on where you want to go. This introduction to net worth breaks it down into simple terms that you can use to create and align your financial goals with your habits.
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What Is Net Worth?
Net worth summarizes your overall financial position at any given moment in time. It is the value of everything you own (assets) MINUS everything you owe (liabilities or debts).
Net Worth = Assets (what you own) – Liabilities (what you owe)
If you have more assets than liabilities, your net worth is positive, and if you have more debts than you have assets, your net worth is negative.
While not everyone tracks this number regularly (including me!), knowing your net worth is very empowering to some and can help them make financial decisions for moving toward their ideal financial life.
The key here is not to get bogged down in the semantics of this number if you are just beginning your financial journey.
How Is Net Worth Different From Income
Many people confuse their net worth with their income, but they are two different metrics.
- Your Income is the money that you earn regularly, either from a salary job, freelance, rental income, etc.
- Your Net Worth is what you own minus what you owe.
You can have a high income, but also have a low net worth. This happens when you are carrying multiple large debts, or you are spending the majority of what you make rather than saving money.
You can also have a lower income, but a high net worth due to smart saving strategies and investing habits.
Why You May Want To Know Your Net Worth
Knowing what your net worth is gives you one metric to measure progress on your financial goals. While it is nice to focus on watching your savings balance grow or reducing your overall debt, your net worth can reflect the overall impact of your financial decisions.
Your net worth can also help you to make realistic financial goals, monitor your progress, and help you remain motivated to continue.
How To Use Your Net Worth
While your net worth is a calculation, it is more than a number. It can be a great financial compass if you use it properly. Here are some ways to use your net worth to help guide your financial decision-making:
- Evaluate Your Spending: If your net worth isn’t growing, you can review your expenses and adjust your budget, or reassess your savings plan
- Track Your Progress: Checking your net worth regularly can show how your money habits are helping or hurting your financial standing
- Setting Goals: If you know what your starting point is, you can set actionable and realistic targets, whether the target is paying off debt, saving for a home, or building your wealth.
- Make Investment Decisions: By understanding your current assets, you can effectively allocate money towards retirement accounts, property, or other investments for your future.
What Counts As Assets & Liabilities?
Before you can calculate what your net worth is, be sure that you understand the pieces that are used to calculate it.
Assets are everything that you have that has value.
Liabilities are everything that you owe money on.
| Examples Of Assets | Examples Of Liabilities |
|---|---|
| Cash & Savings Accounts | Credit Card Debt |
| Retirement Accounts: 401(k) & IRAs | Student Loans |
| Investments: stocks, bonds, mutual funds | Auto Loans |
| Real Estate: home and any rental properties | Mortgage |
| Vehicles: cars, motorcycles, boats | Personal Loans |
| Valuables: art, furniture, art, collectibles | Medical Bills |
| Taxes Owed |
It is possible to have something be an asset and a liability; an example of this is your home. The value of your home can be an asset, while the amount you owe on your mortgage can be a liability.
How To Calculate Your Net Worth:
Here is a step-by-step breakdown to calculate your net worth!
1 – List Out All Of Your Assets
Using the table above as a guide, write down everything that you own, and its current market value.
Be realistic here. Use current balances from your bank accounts, and fair market estimates on your vehicle and real estate.
Don’t be discouraged if they are lower than you would like; these numbers, especially housing and retirement balances, can change depending on current market conditions.
2 – List Out All Of Your Liabilities (or Debts)
Write down everything that you owe. Check your most recent statement for the most up-to-date balances on your loans, credit cards, and medical bills.
3 – Get A Total For Your Assets And Liabilities
Add up all your assets. Then add up all your liabilities. Pretty easy!
4 – Calculate Your Net Worth
Now that you have the total for your assets and liabilities, subtract your liabilities from your assets.
Net Worth = Total Assets – Total Liabilities
5 – Occasionally Update To Track Progress
Revisit your net worth every three to six months. You can use a spreadsheet, an app, or even a printable net worth tracker. You can also include tracking your net worth in a personal financial audit or a quick financial snapshot.
Watching your net worth grow and change can be incredibly motivating and help reinforce any positive changes in financial habits you’ve made.
Remember, Your Net Worth Isn’t Just A Number
Your net worth can be a valuable tool to help assess your overall financial health. It can give you a clear-cut picture of where you are financially and help give you a starting point for some potential financial goals.
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