The Importance of Calculating Your Net Worth

Getting started with saving money is an uphill battle, especially if you’re in debt.  It can feel like you’re devoting a significant chunk of your income to getting out of the hole, but there’s no end in sight. 

By nature, we strive for progress, so it’s only natural that when we start our financial plan, we want ways to see gains over time. My favorite, and in my opinion, the easiest way to gauge overall progress in personal finance, is by calculating your net worth. Net worth is the ultimate look at your comprehensive financial picture. This article breaks down everything you need to know about net worth and how to calculate it.

What is one’s net worth?

Net worth is a reflection of your assets (things with a positive monetary value) minus your liabilities (debts or loans with a negative monetary value). It is designed to show you the overall value of everything in your possession and provide one nice round number.

What does it include?

EverythingThere are other calculations of wealth, such as total investments, which do not include your primary residence, but the net worth calculation utilizes all the pieces of your financial portfolio. This includes everything from your savings and checking accounts to real estate and retirement investments.

Why is it important to know your net worth?

It’s easy to get bogged down in the day to day savings and investment plan. Net worth is an excellent way to take a step back and look at where you are financially in terms of everything you have. Net worth can be a great indicator of your total leverage and if you’re on track to hit long-term financial goals like retirement.

How do you calculate it?

Calculating net worth is a simple formula:

net worth = assets – liabilities

Easy enough, right?  Well, not so fast.  There are a ton of things that fall into the buckets of assets and liabilities.  Times like these, I turn to online calculators that make calculating net worth a breeze. These calculators will prompt you for every input you’ll need to determine your number. Here are some of my favorites:

How can I increase net worth?

Now that you have your number, you’re probably thinking about how you might be able to improve it. Like most of the answers in personal finance, you can achieve an increase in net worth by paying down debt and increasing assets.  This means paying off student loans, auto loans, home loans, etc., while simultaneously building up assets such as real estate, retirement accounts, taxable brokerage accounts, emergency funds, etc.

The most challenging part of increasing your net worth is getting to the breakeven point, $0. I remember a few years ago when I finally crossed over to a positive net worth after paying down my student loans. Even though I had an auto loan, I was finally at the point where I had enough other investments to offset it and put me firmly in the positives. Keep in mind net worth will go down if you make a major investment, like purchasing a home, and that’s okay and to be expected. Consider that every amount you pay down on that investment is a payment towards the positive side of net worth.

What is a good net worth?

In my opinion, progress is more important than the number on paper when it comes to net worth.  For those shrouded in debt, net worth very well may be negative.  Tracking the change over time and getting yourself into positive territory is what matters. I recommend checking your net worth once every six months, as this gives sufficient time to show change. Checking more frequently may only prove to be discouraging if you do not see as much movement as you’d like.

If you want to compare yourself against your peers, most comparisons of net worth are based on age and income bracket. The most recent Survey of Consumer Finances from the Federal Reserve is the commonly cited source of data for net worth in America. (The most recent study is 2013-2016 and we expect 2016-2019 results to be available later this year.)

Source: Federal Reserve Survey of Consumer Finances 2016

From this survey, the median net worth for all U.S. households is $97,300, while the average net worth comes in at a cool $692,100. (America’s super-wealthy tends to skew the averages much higher than the median.) For Millennial-led households, where the head of household was 35 or younger, the median net worth was $11,100 and average net worth $76,200. These numbers are a decent point of comparison, but I highly recommend looking at your situation in terms of your long-term financial plan as well.

The most important thing to remember about net worth is that it’s a benchmark for your overall financial picture, but like any other element of personal finance, it can be changed. Continue making informed decisions about saving, spending, and investments, and I’m sure that you, too, will see your net worth creating a positive trend over time.

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