You probably know the term net worth.
You’ve heard some actoris “worth $10 million.” But what does that mean, exactly? And why should you care about your own net worth?
Check this out first:
Net worth is the best way to understand yourfinancial health. If you track it over time, your net worth will illustrate theprogress you’re making toward saving andpaying off debt.
Have you spent the year building an emergency fund?Your net worth will reflect that. If you spend next year paying off student loans, your net worth will go up again. If your investments increase in value, or you set aside money for retirement, your net worth will increase.
Net worth captures all of your financial efforts in one place, and it’s incredibly easy to work out. Here’s how.
What’s Ahead:
The definition of net worth
Your net worth is the value of all your assets minus all your liabilities.
Your net worth isn’t about your income—your income doesn’t even factor into your net worth. Instead net worth includes savings, investments, and debts.
Think about it this way: If you make $30,000 per year, but you have an investment portfolio worth $3.5 million, you’re going to be more concerned about your total net worth because the $30,000 salary you make is a very small part of your financial situation.
How to calculate your net worth
To calculate your net worth, you need to add up all your assets and subtract your liabilities from the total (Net Worth = Assets – Liabilities). Here’s a little more detail.
- Make a list of all your assets:This includes your house, car, savings, stocks, bonds, other investments, retirement accounts, property, etc. All of your savings accounts should be listed separately and added up together for a total.
- Make a list of all your liabilities:This includes all your debts. Add up your mortgage, car loan, student loans, personal loans, medical debt, and any other debts you have. List them all out separately and add up the total.
- Subtract your liabilities from your assets:Subtract your liabilities from your assets. The total you get is your net worth.
It’s also important to put the date on your net worth calculation because you should calculate your net worth periodically. This allows you to see changes in your net worth over time, which can help motivate you to save more, spend less, and invest.
Want to project how your net worth may change over time? The wealth management app, Wealthfront allows you to do just that. You can view your future net worth and consider the investment returns and inflation impactof various income growth scenarios in their handy mobile app. You can also review your current savings and spendings per month in order to get a better handle on your day-to-day financial picture.
Download our free net worth spreadsheet to help get you started.
Tricky examples of calculating net worth
Your home
When you’re tracking your net worth, you may find that something is an asset and a liability at the same time. For example, let’s assume you own a house that is valued at $250,000 and you have a mortgage on that house that is $150,000. In this example, you should add the full $250,000 to your assets calculation and the $150,000 to your liabilities calculation (each should be its own line item).
Your car
The same approach works for a car. If you own a car valued at $20,000 and you have a car loan for $10,000, then add the value of the car to your assets and the car loan to your liabilities. This way you’ll have the details of all that you own and owe.
Related: How To Pay Off Your Car Loan Fast
Student loans
Student loan debt is one area where you will add this debt to your liabilities and won’t add anything to your assets. It is true that your education and career are assets and will help you earn more in the future, but that isn’t something you can put a monetary value on just yet. For that reason, you should only include student loan debt in the liabilities part of your net worth calculation.
Summary
Your net worth is an easy way to get a sense of your overall financial health. By sitting down and adding up all that you own (bank accounts, car, house, investments, etc) and subtracting everything you owe (mortgage, car loan, student loans, credit card debt), you can see where you stand.
That’s not to say that your net worth is ultimate arbiter of your financial success or failure. It’s sort of liking tracking your weight as part of an overall fitness plan: It’s a helpful indicator, but it doesn’t give you the whole picture. Your weight, after all, doesn’t take into account your muscle mass, or how much you can run. It’s just a number.
You might have a negative net worth because you got an expensive professional degree that will significantly increase your income over the course of your life. That doesn’t mean your financial health is bad. This just means your investment in yourself hasn’t yet paid off in a way that’s easily quantifiable.
Tracking your net worth over time is an easy way to show how far you’ve come.
Readmore:
- How To Get Out Of Debt On Your Own: My Big Fat Guide To Kicking Your Debt’s Butt
- How Your Net Worth Is Affected By Self-worth
Net worth is a pivotal metric reflecting an individual's financial standing. It's the difference between your assets and liabilities, emphasizing financial health beyond mere income. Understanding and calculating net worth provide a holistic view of your financial trajectory. Here's a comprehensive breakdown of the concepts within the article:
Net Worth Definition:
Net worth = Total Assets - Total Liabilities
- Assets: All possessions with monetary value, such as property, investments, savings, retirement funds, and valuable items like cars.
- Liabilities: Debts and financial obligations like mortgages, car loans, student loans, personal loans, and credit card debts.
Calculating Net Worth:
- List Assets: Catalog all assets individually—house, car, savings, stocks, retirement funds, etc.
- List Liabilities: Record all debts separately—mortgage, loans, credit card balances, etc.
- Subtraction: Deduct total liabilities from total assets to derive net worth.
- Regular Assessment: Periodically evaluate net worth to track progress, encourage savings, and guide financial decisions.
Tricky Examples:
- Home: If you own a house worth $250,000 with a $150,000 mortgage, add $250,000 to assets and $150,000 to liabilities.
- Car: For a car valued at $20,000 with a $10,000 loan, consider the car's value as an asset and the loan as a liability.
- Student Loans: Include student loan debt only in liabilities as education's future value isn't monetarily quantifiable presently.
Importance and Limitations:
- Financial Health Indicator: Net worth reflects overall financial health by assessing what you own versus what you owe.
- Relative Assessment: It's akin to monitoring weight in a fitness plan—helpful but not the entire picture.
- Investment in Self: A negative net worth due to investing in education doesn't necessarily denote poor financial health, especially if it's an investment that will yield returns over time.
Understanding net worth aids in better financial decision-making and showcases progress over time. It's a tool for comprehensive financial management rather than a definitive measure of success or failure. Tracking net worth evolution can illustrate the journey towards financial stability and growth.
The article also highlights resources like wealth management apps and spreadsheets for projecting and tracking net worth. It emphasizes how net worth encapsulates an individual's financial efforts, serving as a compass for fiscal progress.
For additional insights into managing debt and understanding the intersection of net worth and self-worth, the article delves into deeper aspects of financial wellness and its correlations.
