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Understanding and Calculating Your Net Worth
Understanding your net worth gives you a better understanding of your overall financial health.
How do you know if your finances are in good shape? If you’re like a lot of people, you look at your checking and savings balance, eyeball your debt payments and hope for the best.
While that’s a start, there’s more to your financial health than just what you have in the bank. You really want to take a look at your net worth. Let’s dive in and see what your net worth encompasses, how to calculate it, and ways you could improve it.
Key Takeaways
When you understand your net worth, you have a better idea of your overall financial situation and where you could improve your finances.
Net worth may be positive or negative; positive means you have more assets than liabilities and negative means you have more liabilities than assets.
You may be able to improve your net worth by paying off debts and increasing your savings and assets over time.
What Does Net Worth Mean?
Simply put, your net worth refers to the total value of your assets (what you own) minus the total value of your liabilities (what you owe others).1
So, what counts toward your net worth? Assets are items with monetary value, like real estate, cash, investments, artwork, and anything else with a tangible or definitive value.2 Liabilities are obligations like your loans, credit card balances, and any other debt you may have.3
Here’s a quick breakdown of positive, negative, and zero net worth:
Positive net worth: your assets are greater than your liabilities
Negative net worth: your liabilities are greater than your assets
Zero net worth: your assets and liabilities are equal
This concept applies to both individuals and businesses and helps both gain a better understanding of their overall financial health and may help them make important decisions. For individuals, these decisions could be whether you should buy a new home or if you should trade your old car in for a newer one.
For businesses, these decisions may focus on whether they could expand and invest in a second location or new service offering or if they need to tighten their budget a bit to keep from taking on debt or having to lay employees off.
We’ll go over an example in a bit to show how this works in real life.
Why Is Net Worth Important?
By understanding net worth and knowing where you stand financially, you may be more mindful of your spending, better prepared to make smart financial decisions, and more likely to achieve your goals.
When you have a positive net worth, you may have less debt and be better able to build savings and improve your financial well-being. But when you owe more than you own, you may want to focus on paying off existing debts.
Comparing Your Net Worth
Knowing your net worth is helpful, but you may find it easier to understand where you fall if you have something to compare yourself to.
Take a look at where you fall compared to your peers according to the latest Federal Reserve Changes in U.S. Family Finances report:4
Median Age | 2019 | 2022 | Change from 2016 to 2019 |
|---|---|---|---|
Younger than 35 | $16,100 | $39,000 | 143% increase |
35-44 | $105,900 | $135,600 | 28% increase |
45-54 | $195,400 | $247,200 | 27% increase |
55-64 | $246,300 | $364,500 | 48% increase |
65-74 | $308,800 | $409,900 | 33% increase |
75 or older | $295,400 | $335,600 | 14% increase |
How to Calculate Your Net Worth
Calculating your net worth is relatively simple. You could use a net worth calculator, which lets you enter your financial information for major assets and debts or calculate it manually.
Calculating your net worth manually takes time, but may give you a better understanding of your true financial situation since many calculators limit the asset and liability categories you could include.
Start by adding together the value of your liquid and non-liquid assets. Liquid assets are items that you’re able to access immediately and use as cash or quickly turn into cash. Non-liquid items are things like investments, insurance policies, your home, - items that may be difficult to access or turn into cash.
Your combined assets may include the following:
Your personal checking and savings accounts
Certificate of deposit accounts
Retirement savings accounts
The equity you have in your home
The equity you have in your car and other vehicles like RVs or ATVs
Antiques
Electronics
Jewelry
Artwork
Furniture
Appliances
Keep in mind that you may want to reach out to an expert or an appraiser for items without clear monetary value to help determine the value.
You also need to total up your liabilities, which may include:
Medical bills
The principal balance on a mortgage
The principal balance on any vehicle loans
The principal balance on your student loans
The principal balance on your home equity loans or lines of credit
Credit card balances
Once you have the totals of your assets and your liabilities, simply subtract the liabilities from your assets to get your net worth.
If you’re unsure about what counts toward your net worth, consult with a financial advisor.
Net Worth Example
So, how does net worth play out in real life? Let’s look at a quick example.
Say you have the following assets:
Home equity of $250,000 (the difference between the value of your home and what you still owe)
An investment portfolio worth $75,000
Other assets (car, furniture, artwork, electronics, and jewelry) worth a collective $35,000
Your total assets come to $360,000
Now, total your debts:
A car loan with a remaining balance of $15,000
Student loans with a total remaining balance of $13,000
Personal loans with a total remaining balance of $8,000
A remaining mortgage balance of $150,000
Your total liabilities come to $186,000.
Now, let’s calculate your net worth. The calculation is as follows:
Total assets – Total liabilities = Net worth
$360,000 - $186,000 = $174,000
In this example, you have a positive net worth of $174,000.
How Could I Improve My Net Worth?
Whether you’re trying to improve a negative net worth or increase a positive net worth, there are things you could do to improve your situation. Here are some tips to keep in mind:5
Save More: Building your savings increases your assets and helps offset your liabilities. Consider taking advantage of a high-yield savings account to put your money to work.
Reduce Debt: The less debt you have, the higher your net worth could be. Start paying down what you owe and be strategic when taking on new debt.
Increase Assets: In addition to building your savings, you may want to diversify your assets. Diversified assets may have a better chance of growing in value over time and may help you weather downturns in certain markets. Diversifying may include investing in diverse portfolios, purchasing items that appreciate, or acquiring additional real estate.
Final Thoughts
Your net worth serves as a snapshot of your financial situation. By reviewing it regularly, you may gain valuable insights that could empower you to make informed and strategic money moves. This ongoing review helps you both understand your current financial health standing and identify areas for improvement.