What is Net Worth and How to Calculate Yours?

Hey there! 🍒

Ever wondered how you stand financially?

I mean, do you know how you truly stack up financially in the world? Knowing your net worth isn’t just a numbers game; its about understanding your financial health.

By the end of this simple and short guide, you’ll have a clear picture of your financial standing.

Even if you’re just a kid.

With that clarity you’ll be more informed for whatever financial decision you’ll have to tackle! Whether you’re setting new financial goals, or judging if an investment is a good idea, and to understand just how far you’ve come.

What is Net Worth?

Let’s quickly clear up a common confusion first. Net Worth is not your income. And it is more than just the number in your bank account.

Sometimes people mistake those numbers because they’re scared of facing their debt. So what is Net Worth exactly?

Simply put: Net Worth is the difference between what you own (assets) and what you owe (liabilities).

Net Worth = Total Assets – Total Liabilities

If you take all your possessions and deduct what you owe, that remaining value is your net worth. Think of it as a financial snapshot of where you are now.

Why You Ought to Know Your Net Worth?

Knowing your Net Worth is like maxing out your stats bar in the game of life.

Checking in on this crucial metric every now and again gives several benefits. Knowing where you are now helps better guide you to where you are going – whatever goal that would be. You can be starting from a good or bad point, but that clarity helps you to be more conscious of your financial habits.

Seeing a tangible number can be a powerful motivator. If your net worth number is less than you like, it’s time for the hard decisions and calculated decisions to improve.

You might have to decrease your expenses and lifestyle, work harder to increase your income, and make smarter investments. Seeing your net worth grow can be a rewarding affirmation of your financial strategies goals.

Knowing where you are financially compels you to make smarter spending habits and set more achievable financial goals – especially for your retirement down the line.

A clear solid number guides how aggressively you should save and work to get to the point where you can live off comfortably in your golden years.

Example of Net Worth

Consider a family with the following assets:

House valued at $500,000
Car $50,000
Investment portfolio of $100,000

Liabilities Include:

Outstanding mortgage balance of $100,000
Car loan $10,000

Therefore, the family’s net worth can be calculated as:

[$500,000 + $50,000 + $100,000] – [$100,000 + $10,000] = $540,000

The family’s net worth is $540,000.

Example of Negative Net Worth

A negative net worth is the result when the total debt is more than total assets. Consider a family with the following assets:

House valued at $500,000
Car $50,000
Investment portfolio of $5,000

Liabilities Include:

Outstanding mortgage balance of $100,000
Car loan $10,000
Student Loan $40,000

Therefore, the family’s net worth can be calculated as:

[$500,000 + $5000 + $50,000] – [$100,000 + $10,000 + 40,000] = – $45,000

The family’s negative net worth is -$45,000.

Don’t fret! A negative net worth is not uncommon for young families. Things like student loans or family obligations happen, and it’s just a sign that the family needs to focus on debt reduction.

Read related topics: Get out of Debt – Don’t Panic

So keep in mind: while the Jone’s next door may paint a great picture with their nice house and new cars, their debt could be invisible. It’s possible that the Jones’ have several loans out and are sinking in debt with a negative net worth. All the shine is not gold, and the wealthy are stealthy.

How to Calculate Your Own Net Worth

Calculating your net worth is a straightforward process.

Step 1 – List down all your assets

List down all your assets and possessions. This includes:

The market value of your home and other real estate under your name
The value of your vehicles (cars, boats, etc.)
Personal property like Jewelry and paintings and collectables
Investments like stocks and bonds

Step 2 – List all your liabilities

List down all the liabilities and things you owe. This includes:

Mortgage
Car loan
Student debt
Credit card balances

Step 3 – Subtract your liabilities (step 2) from your assets (step 1). The result is your net worth!

Given with the few examples above, it possible to have a positive or negative net worth.

If you have $50,000 in assets and $50,000 in liabilities, that means your net worth is $0. And if your liabilities are $60,000 it means your net worth is negative -$10,000.

Checking in on your net worth every quarter is recommended to start.

There’s too many fluctuations in the stock market (your portfolio) to keep in check everyday, and checking once a year may lose out investment opportunities.

When you are financial stable and confident, you should assess your net worth once a year – at minimum. This annual check-in aligns well with other yearly financial tasks, such as tax preparation or annual budget reviews.

It’s also wise to evaluate your net worth following significant life events like marriage, buying a home, receiving an inheritance, changing jobs, or any other event that substantially affects your financial situation.

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How much should I save?

According to the Federal Reserve, the average net worth for an American household in 2019 was roughly $748,800. This, of course, is just an average and excludes the outliers.

Age	Average Net Worth
Under 35	$76,300
35-44	$436,200
45-54	$833,200
55-64	$1,175,900
65-74	$1,217,700
75+	$977,600

How can I improve my net worth?

If you’re looking to improve your net worth (regardless if it’s positive or negative) because who isn’t? There are several ways to do it.

Increase your income (Consider side hustles and freelance gigs)
Lower your debt (I recommend prioritizing high-interest debt first)
Stack assets (Add more into your investments and retirement accounts)

(TLDR) Too Long Didn’t Read Summary

Your financial net worth is not intrinsic to your personal worth.

Your net worth is a powerful tool to know. It’s more than just your number – it’s a reflection of your financial habits and decisions up to this point.

It can help you make better calculated decisions in your unique situation.

Better yet, you can protect and arm yourself with whatever comes your way – nothing will fly past your radar when you’re aware.

Remember the simple formula:
Net Worth = Total Assets – Total Liabilities

Your net worth can go up. It can go down. It can fluctuate. Just because your net worth took a dip at one point doesn’t mean it’s not progress – it could be strategic like taking out a mortgage for a home or student loans to better your earning potential. So long as you’re tracking and analyzing on a consistent basis – you’re on top of it!

And it is never a gauge of your worth as a person.

What’s your net worth? Do you know if it’s in the positive or negative?