Do you know your personal net worth? In this post, we take a look at net worth: what it is, why it matters, and how (surprisingly easy it is to) calculate.
Welcome to #MakeCentsMondays, a series of blog posts where we focus on longer-term, bigger-picture finances. The goal of Make Cents Mondays is to make financial concepts easier to understand and help you on your path to financial freedom.
When it comes to finance, net worth is a term tossed around quite a bit. Just thinking of the words “net worth” sounds like you may be talking about some billionaire’s fortune! However, net worth is actually a term that applies to everyone, and is an important number to understand.
What is Net Worth?
Net worth is defined as the current value of all your assets (things with a positive value) minus your liabilities (things with a negative value). In essence, net worth is a snapshot of your overall financial picture. It helps show you, in one number, exactly where you stand today with everything you own and everything you owe.
How do I calculate my Net Worth?
As mentioned above, net worth is simply your assets minus your liabilities. Assets include things like savings accounts, cash, iPhones, stocks, a car, a home. Liabilities include things like credit card debt, student loans, a mortgage, car payments/loans, etc.
Net Worth = Assets – Liabilities
Using the graphic above, let’s take a look at a couple of examples.
In Example A, we have a recent college graduate who owns a used car worth $4,000. She participates in her workplace’s 401k plan, and currently has $11,500 in the account. She rents an apartment, has $100 cash, $150 in gift cards, as well as two credit cards and one charge card in her wallet. She owes $4,500 between the two credit cards and $1,500 on the charge card. She also has an iPhone, as well as her old college laptop. Our recent grad currently has $19,000 in student loans. She also owes her sister $100 for some Christmas gifts they purchased for their parents last year.
When we look at the overall financial picture, we see that her net worth is actually negative. This is not uncommon for many people in their twenties, as it takes time to pay off debts (especially student loans). Over time, if she continues to earn more and pay off the debts, her net worth will break even and eventually start growing.
In Example B, we have a young man in his thirties who owns a $450,000 condo in a big city. Because he can commute using public transit, he does not own a car. He contributes to his retirement accounts (currently, the value of which is $51,500), owns an iPhone, AirPods, an Xbox, and a big screen TV (worth a total of $2000). The balance of his mortgage is $350,000, and he has $5,000 left of student loan payments to make.
This example is a little less straightforward, since this homeowner has a mortgage, some credit card debt, and student loans, all of which have varying interest rates (more about that in another post). What’s more, the value of the home today ($450,000) could go up or down as the market changes, but what he owes on the home ($350,000) is something he needs to pay back regardless of how much the house is worth in the future. Remember, though, that net worth is a snapshot in time: so for the young man in Example B, we add up all of his assets and add up all of his liabilities. The difference between the two is positive, meaning that the value of all he owns is higher than what he owes.
When it comes to determining your net worth, you can quite literally use a pen and paper to figure it out! Simply add up all of your assets on one side of the paper, and then add up all of your liabilities on the other. The difference is your current net worth.
You can also use a multitude of programs and apps if you prefer something a little more robust. My favorite way to track my net worth is through Mint. This app allows you to connect all of your accounts in one place, and gives you a snapshot of your net worth when you log in. You can dig into all of the specifics: cash, investments, real estate, credit cards, loans, debt, pretty much all the major categories which make up assets and liabilities discussed above. As you continue using the app, you can even track your net worth over time, showing any progress you’ve made as well as general day-to-day fluctuations.
Why is my Net Worth important?
OK, so we know what net worth is, and how to calculate it. But does it really mean anything?
YES!
Your net worth is arguably the most important indicator of your financial health, and how well you are tracking to increasing your value over time.
In many cases, your net worth is more important than your income, since your net worth looks at your overall financial picture instead of how much money you’re currently making this month or this year. Your income also doesn’t show you where your money is going: if you make $100,000 each year but spend it all, you are not building any savings or retirement for the future. Your net worth is a better indicator as to what is truly going on.
Your net worth can also tell you whether or not you’re sticking to any budgets or other savings goals you might have. Looking at all of the different parts that make up your net worth will tell you where your money is going: are you increasing your assets (building wealth), or decreasing your liabilities (reducing debt)?
Last but not least, your net worth can help you make big decisions and plan for the future. Knowing the dollar value of what you owe versus what you owe can help guide decisions such as buying a house, choosing a new career path, building a family, or planning for retirement.
To sum it up…
Your net worth will fluctuate day to day, based on whatever might be going on in your life, the world, or the stock market. The important thing is to keep an eye on it by checking on your net worth regularly, so that you know exactly where you are on your financial journey.
Do you currently track your net worth? Or are you in need of a check-in? If you have any questions about what should be included in net worth or how to track it, feel free to reach out to Jackie@JackieMakesCents.com for answers and the latest financial tools!
