What Is Net Worth (And How to Find Yours!)
You've seen it before: people talking about their net worth as a success metric.
Heck, you've probably even seen mine on this very website!
But what is net worth, and why does it matter?
And, most importantly, how do you calculate YOURS?
WHAT IS NET WORTH?
Net worth is an indicator of your financial health*: the difference between what you own (your assets) and what you owe (your liabilities).
What does that mean?
It means that if you paid off everything you owed at this moment, would you have anything left over?
It’s a measure of the “cushion”, so-to-speak that would be left if you paid off all of your debts today, and it’s a better measure of financial stability than income alone.
For example: Let’s say you see someone driving down the street in a Lamborghini… you’d probably think they were pretty financially healthy, right?
Well, what if I told you that person used every last dollar they had to finance the Lamborghini… in other words, their net worth is <$0 since they don’t technically own it and all their money is tied up in financing… what do you think of their financial health now?
Sure, maybe they have a decent income, but they now have no savings and no cushion to fall back on if that income were to be disrupted by job loss or something else.
On the other hand, what if you saw someone driving down the street in a Honda Accord… you probably wouldn’t think much of it, right?
But what if I told you that person had a net worth of $10M - meaning after all their debts were paid off, they’d still have $10M left … what would you think of their financial health?
This is why net worth is important.
HOW NET WORTH IS CALCULATED
Technically speaking, it’s calculated as your assets minus your liabilities.
We’ve talked about assets and liabilities before; generally speaking, assets are investments that will put money into your pocket in the long run, whereas liabilities are things that will ultimately take money out of your pocket.
Some examples of assets might be stocks, the current market value of real estate, cryptocurrency, precious metals or jewelry made from precious metals, and more.
Liabilities include all debt owed (including debt owed on assets, like what you still owe on a house). Other debts might be student loans, car loans, credit card debt, outstanding medical bills, and more.
HOW TO ESTIMATE YOUR NET WORTH
You can get specific with your net worth, but let’s talk about how you can quickly get a general idea. It comes down to: what assets and liabilities do you currently have? Here are the big ones to consider.
ASSETS
1. Do you have a house? If so, what's the current market value of your property?
2. Do you have any investments in the stock market? (these may be inside a retirement account like a 401k or an IRA). Log into your account to see the current value.
3. Do you own your car? If so, what's the trade-in or resell value?
4. How much cash do you have on hand and in checking and saving accounts (in a traditional bank, a High-Yield Saving Account (HYSA), or elsewhere)?
Add all of those numbers up to get a total of your assets.
LIABILITIES
1. If you own a house, is it paid off? If not, how much do you still owe?
2. Do you have any outstanding loans like student loans, car loans, or any other type of loan? How much are your balances?
3. Do you have outstanding medical bills? How much are your balances on your medical bills?
4. Do you have outstanding credit card debt? How much are your balances on your credit cards?
Add all of those numbers up to get a total of your liabilities.
Although we can get much more specific, using these 8 items can give you a reasonable feel for your net worth as we’re capturing many of the common larger-ticket assets and liabilities.
All that’s left to do is subtract your liabilities from your assets… and that, my friend, is your net worth.
NET WORTH EXAMPLE
Assets:
- Home: $300,000
- Retirement accounts: $100,000
- Car: $20,000
- Savings: $50,000
Total assets: $470,000
Liabilities:
- Mortgage: $200,000
- Car loan: $10,000
- Credit card debt: $5,000
Total liabilities: $215,000
Net worth: $470,000 - $215,000 = $255,000
This person's net worth is $255,000.
THE BIG PICTURE
How does your financial health look?
Do you have a positive net worth where your assets are greater than your liabilities, a zero net worth where your assets are equal to your liabilities, or a negative net worth where your liabilities are greater than your assets?
If you’ve got a positive net worth, congratulations! I know it feels good to know you’ve got a cushion and a bit of a security net.
If you’ve got a zero or negative net worth OR if you have a positive net worth but you’d like it to be higher, here’s the good news…
Knowledge is power and KNOWING your net worth might just light a fire for you to make a change.
NEXT STEPS
If you want to increase your net worth, it’s important to acquire more assets and one of the easiest ways to get started is investing in the stock market.
If you’re not sure where to start, the first step would be to calculate how much you can afford to invest and I have just the thing to help with that.
It’s my free budget calculator guide and it’s the first thing I have all my students and private clients complete.
This simple but powerful guide shows you how much you make versus how much you spend each month, and what is left over (and that is the amount you can use to start investing or to increase your investments in the stock market).
Now you have an idea of your net worth, and you know your next steps… all that’s left to do is for you to DECIDE TO TAKE ACTION.
Remember, nothing will change unless you do… decide right now to make a change and increase that net worth for the better!
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