You probably know the term net worth.
You’ve heard some actor is “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 your financial health. If you track it over time, your net worth will illustrate the progress you’re making toward saving and paying 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.
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 impact of 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
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).
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 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.
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.
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