If a financial advisor asked you how you were doing money-wise, what would you say? Your answer might involve your salary, how much you have in savings, or the equity you have built in your home. But do any of these really offer the full picture? And would you be able to gauge where you stand today versus five or 10 years ago?
Instead of looking at a few specific financial factors, you can get a more complete idea of where you stand by calculating your net worth. This number not only considers all your debt and assets but also gives you a straightforward way to track your progress as the years go on.
What is net worth?
Put simply, your net worth is your personal equity: a representation of where you stand financially at any given moment, taking into account both your assets and liabilities. Calculating your net worth involves tallying up all your assets and then subtracting everything you owe. Your net worth can be either a positive or negative number.
Your net worth offers a much more comprehensive snapshot of your financial situation, as opposed to simply analyzing your income, a retirement portfolio, savings account balance, or even the amount you still owe on your home mortgage. It looks at any and all debtors and considers all of your assets — whether they are tangible, liquid, or other.
Why knowing your net worth is important
Do you know where you stand financially at this very moment? Are you on track to meet your short- and long-term financial goals? Are you focusing your efforts in the right place or are there some changes you should consider making?
Knowing and tracking your net worth can help answer all these questions and even guide your decisions moving forward. Here are a few reasons it’s so important.
1. It reveals more than income
Your income is obviously a factor for saving and building your net worth. It’s definitely not the only factor, and in many cases, it’s not even the most important.
What you spend and save is much more important than what you make. There is no shortage of celebrities and athletes who’ve made millions and eventually filed for bankruptcy. On the other hand, we’ve all heard stories of the janitor or librarian who dies a millionaire, even after decades of earning a low salary.
Your income doesn’t offer a complete picture of where you stand financially. You also need your net worth to tell you how well you’re doing with that money, whether you bring in $30,000 a year or $3 million.
2. Our focus changes over time
Naturally, our finances have a tendency to ebb and flow through different seasons of life. For instance, you may spend a few years paying off student loans or trying to pay off credit card debt, but not focusing quite as much on saving for retirement. Once you’re out of debt, your focus may shift to building an emergency fund or paying off your home mortgage early.
That’s why it can be difficult to understand the complete picture if you’re just looking at individual aspects of your finances. By calculating your net worth instead, you can see how your overall situation is shifting and whether you’re moving in the right direction.
3. You can identify unnecessary expenses
As you track your net worth over time, you may find that you can identify areas of unnecessary spending in your life. This might mean analyzing your finances and budgeting to see whether you can create more wiggle room for savings each month.
Some folks could find that they are overspending on key expenses such as their home, car, or the annual expenses associated with their investments. If this is the case for you, consider whether downsizing or making a change could have a significant impact on your overall financial picture.
4. It helps guide your path forward
Keeping an eye on your net worth can be, well, eye opening. You may make some profound discoveries, some of which could have a significant impact on your financial decisions.
For instance, if you’re earning more than ever before but find that your net worth growth is slow or stagnant, you may want to analyze your household spending.
If you’re saving for retirement each month but aren’t on track to meet your goals, your efforts may need adjusting. If you find that your net worth is decreasing, it’s time to identify areas of concern and address them. And if you are already operating on a bare-bones budget but still aren’t growing your personal net worth quickly enough, you might want to find ways to make extra cash.
Knowing and tracking your net worth could be the motivator you need to make financial changes today that could positively impact your future.
How to calculate net worth
At its core, calculating net worth is very simple: just add up the value of your assets then subtract your total debt. The result is how much you are “worth.”
Of course, this may be easier said than done for some folks. Do you include every asset — like that old flexible spending account (FSA) with $500 sitting in it — or just the big things? Do you add up all debt, or just the large balances? How often should you update and recalculate?
And finally, where do you even start?
Add up the liquid assets
The first, and perhaps easiest, place to start is with calculating your most liquid assets.
Liquid assets include accounts that you could readily liquidate into cash if needed, including:
- Savings accounts
- Checking accounts
- Money market accounts
- Investments such as securities or bonds
- Certificates of deposit can also be considered liquid; just note that there may be penalties involved if you pull the funds out before they reach maturation.
If you’re one of those folks who stuffs the mattress full of cash, add that total into this category too.
Tally your investments
Although some investments are categorized as liquid, they are considered to be less liquid than the accounts listed above. That’s because liquidating would involve selling the investments, potentially at a loss and/or with a penalty. Depending on the market and the type of investment, liquidating stocks can also take time.
Your investments could include:
- Retirement savings, such as a 401(k), IRAs, a pension, etc.
- Health savings accounts
- Real estate property
- Other investments, like stocks, bonds, exchange-traded funds, and mutual funds
- The cash value of a permanent life insurance policy that you own (because term life insurance has no value while you’re alive, it doesn’t count toward your assets)
This category could also account for intangible assets. For example, if you have lent money — to a child, friend, or even through a P2P platform — you might want to include the investment owed back to you here. You could also include the value of patents owned, copyrights, etc.
Include your tangible assets
Lastly, add up the market value of any tangible assets you own. This category could include:
- The fair market value of your vehicle(s)
- The full market value of your home (we’ll talk about your mortgage balance in a minute)
- Furniture and equipment
- Antiques, artwork, weapons, or other collectibles
- Household goods
You can be as specific as you’d like with this category. For instance, you could choose to only calculate the value of large assets, such as your car and jewelry, or you could account for any items you own that have a monetary value (such as clothing, tools, and the like).
Now that you know what the positive column of your net worth looks like, it’s time to account for the liabilities.
Subtract your secured debt
First, you’ll want to subtract all secured debt for which you’re responsible. Secured debt includes things like the balance on your home mortgage or what you still owe on your vehicle(s).
Because you added the market value of these assets already, subtracting what you still owe will ensure that only the equity gets calculated in your current net worth.
...and your unsecured debt
Next, you should subtract any unsecured debt that you may still owe. This often includes things like credit card balances, student loan debt, personal loans, and so on.
If you have any other debt not mentioned here — but for which you are liable — be sure to subtract it from your net worth calculations.
Net worth in action
What does all of this math actually look like? Let’s look at a couple examples.
Kyle is a 45-year-old husband and father. He and his wife are working to get out of credit card debt while also saving for retirement. He has a whole life insurance policy that has built up a cash value over the years, and together he and his wife have a few assets (valuable art, jewelry, equipment, and the equity in their current home/cars).
|Home mortgage balance||- ($221,000)|
|Family home (current market value)||+ ($282,600)|
|Credit card balances||- ($13,400)|
|Combined retirement accounts||+ ($178,000)|
|Savings and checking accounts||+ ($19,150)|
|Student loan debt||- ($27,840)|
|Tangible assets (jewelry, fine art, equipment)||+ ($36,000)|
|Permanent life insurance policy, cash value||+ ($23,900)|
|Auto loan balances||- ($17,840)|
|Two personal vehicles (fair market value)||+ ($37,600)|
|Total Assets||+ $577,250|
|Total Liabilities||- $280,080|
If you take the total assets ($577,250) and subtract the total liabilities (-$280,080), Kyle and his wife find that they have a positive net worth of $297,170.
Our second example is Rebekah. She is 27 years old, single, and just settling into her career. She has student loans, credit card loans, and still owes on her vehicle. However, she has started saving up for a townhome and is funding her retirement account for the first time.
|Credit card balances||- ($27,200)|
|401(k) retirement savings||+ ($4,175)|
|Savings and checking accounts||+ ($9,350)|
|Student loan debt||- ($60,800)|
|Car loan balance||- ($7,150)|
|Personal loan balance||- ($3,910)|
|Personal vehicle (fair market value)||+ ($16,400)|
|Total Assets||+ $29,925|
|Total Liabilities||- $99,060|
If you take the total assets ($29,925) and subtract the total liabilities ($99,060), Rebekah has a negative net worth of $69,135 due to her student loan, personal loan, auto loan, and credit card debt. As she continues to whittle down those balances and build her savings, however, her net worth might turn positive and continue to grow.
Be sure to track your progress
Knowing your net worth is a powerful tool, but only if you put it to work. Make a note of your calculations (or create and save a spreadsheet) so you can track your progress over time.
If you see your net worth dropping or growing at a minimal pace, it may be time to reevaluate your efforts. If you see it growing at a healthy speed and/or responding to certain financial moves, you know you’re on the right track.
6 tips for increasing your net worth
If you want to increase your net worth, or growing that number faster than before, there are a few important things you can do.
- Learn how to manage your money. The better grasp you have on your finances — where your money goes, how much you’re spending, where you’re focusing your savings efforts — the more likely your money will work for you. If you are using all your earnings each month but not seeing your net worth increase much, you might need to reevaluate where that money is going.
- Live below your means. One of the most profound things you can do for your finances is to live below your means. Just because you can afford something (a house, car, eating out for dinner each night), doesn’t mean you should buy it. And whatever you don’t spend on unnecessary expenses each month can go toward building your net worth. Consider analyzing your income and budget, tracking your debt, and boosting your efforts to spend less and save more.
- Get out of debt. Being in debt is a double-edged sword: your budget is impacted by the payments you have to make toward that debt each month, and the balances wind up costing you even more over time in the form of interest. Getting out of debt as quickly as possible might not only save you more money in the long run, but could also open up your budget for more net worth-building opportunities.
- Learn how to invest money. Whether you invest in the stock market, buy rental property, or lend through a peer-to-peer platform, investing is one great way to potentially grow your money. Just remember that all investing comes with risk. Spend some time learning what sort of risk tolerance you have and the investments that interest you so you can make money moves that are right for you.
- Put your savings to work. Tucking your savings in a coffee can above the fridge might feel safer, but that money never has a chance to grow: if you put $1,000 in, you’ll only ever get $1,000 out. Instead, let your money go to work for you: consider putting emergency funds into high-yield savings accounts so they are readily accessible but earning interest. You can also look into savings vehicles such as CDs, which are less accessible but have the potential to grow more over time.
- Earn more. Income isn’t everything for building net worth; you still have to manage your funds properly. However, the more you earn, the faster you might be able to meet goals, such as paying off debt, building savings, or funding retirement accounts.
FAQs about how to calculate your net worth
Do you include your 401(k) in your net worth calculation?
The balance of your 401(k) or other retirement accounts should be included in your net worth calculation. Although these funds are not considered liquid — there are often penalties involved with using the funds ahead of retirement — the savings are still considered part of your overall personal equity.
Do you include your home in your net worth calculation?
Yes, you should include your home’s full market value in your net worth calculation, in the asset column. If you are still paying off the mortgage, be sure to also include that balance in the liabilities column; the net difference will represent the home equity you have established.
How do you figure out your net worth?
To calculate your net worth, or personal equity, you simply need to add up all of your assets (liquid, tangible, intangible, etc.) and subtract any debt you may have (secured or unsecured). The difference between what you own and what you owe is your net worth, which can be positive or negative.
The bottom line
Knowing how you’re doing financially can be a key factor in assessing where you stand and how to move forward with your efforts. Actually determining where you stand, however, can be trickier than just looking at your bank account or income.
Calculating your net worth provides you with a complete picture of your financial health, boiled down to one simple number. By tracking this number, you can gauge your success and track your progress over time, regardless of which season of life you are in.