If you’ve ever looked up how much a celebrity, entrepreneur or CEO is worth, you’re no doubt familiar with net worth. But did you know that you have a net worth too? That’s right. It isn’t just a term for Fortune 500 companies and the wealthy. In fact, it’s a valuable tool for anyone who makes money or has financial goals. If you’re serious about your financial future or just curious to see where your finances stand, read on to learn more about net worth, how to calculate it and tips for improving it.
What Is Net Worth?
Net worth is the difference between the amount you own (your assets) and the amount you owe (your liabilities). People, businesses and even countries can have a net worth and that number can be in the positives or the negatives. If you have a positive net worth, the value of your assets exceeds the amount of debt you have. If you have a negative net worth, the amount of money you owe exceeds the value of your assets. You could sell everything you own and still be in debt.
Why Does Net Worth Matter?
Net worth is not just a reason to brag about your financial prowess. Net worth is one of the best ways to check in on your financial health. As you track it over time, you’ll be able to watch your progress, make sure you’re hitting your net worth checkpoints as you age and make preventative changes if you notice you’re falling behind. Knowing your net worth keeps you on track as you work towards your financial goals and prepare for retirement.
How To Calculate Net Worth
To calculate your net worth, you’ll need to know how much your assets are worth and how much debt you owe.
First, make a list of all of your assets and their total value (some may be estimates) and add them all up for a grand total. Assets are anything you own that has a monetary value. They can be liquid, meaning they can easily be turned into money. Liquid assets are things like checking or savings accounts as well as stocks or bonds. Assets can also be non-liquid, which means they cannot easily be sold or turned into money. Examples of non-liquid assets include houses, cars or land.
Once you have your assets listed and added up, make a list of all of your debts, or liabilities. These may include your mortgage, student loans or any personal loans, a car loan or credit card debts. Add those up for a grand total. With this information, you can now calculate your net worth.
The formula for calculating your net worth is pretty straightforward. Use this equation
Total Assets – Total Liabilities = Net Worth
Here’s an example using real numbers:
Jane is in her 30s. She owns a home, has a savings account and contributes to her 401(k). She also has a car and a few valuable pieces of jewelry. She owes a small amount of credit card and student loan debt, and she also has a car loan and a mortgage. She decides to figure out her net worth, so she lists out her assets and liabilities and finds the totals for each.
The value of Jane’s home is estimated at $190,000. She has a combined total of $10,000 in her checking and savings accounts, and also has $30,000 saved for retirement in her 401(k). Her car and jewelry are valued at $10,000 total. Jane’s assets come to a grand total of $240,000. However, Jane has some debt, too.
Jane has $1,500 worth of credit card debt and still owes $10,500 on her student loans. She has $1,000 left on her car loan and her mortgage balance is $127,000. Jane’s liabilities total $140,000.
To calculate her net worth, Jane subtracts her total liabilities from her total assets:
$240,000 – $140,000 = $100,000
Jane’s net worth is about $100,000. Since she is in her 30s, Jane wants to have a net worth of at least half of her annual salary, which we’ll say is $60,000. Well over her goal, Jane is on the right track and her wealth is moving in the right direction.
Once you calculate your net worth once, you shouldn’t stop there. Net worth changes constantly – even daily. Regardless if you are on the right track or even excelling, you should always check in by calculating your net worth periodically (at least quarterly). Date your net worth calculations and record them on a spreadsheet or some type of other document. Keep this data collection so you can look back on all of your past net worth numbers and see how far you’ve come and where your finances are going.
How To Improve Your Net Worth
Whether you are satisfied with your current net worth or frustrated with your number, there is always room for improvement. Net worth is not static. It can change drastically throughout your life and, if you’re doing it right, it should increase as you age.
If you’re in your early 20s, your net worth may be small or even negative, especially if you’re living in an apartment or with your parents, just starting out in your career or dealing with student loan debt. As you move through various life stages such as getting a promotion at work, purchasing a home or contributing to a 401(k), your net worth should eventually move out of the red. But it takes a lot of time and strategy to get there.
Improving your net worth is a continuous commitment – one that will last throughout your career. Increasing your number is as simple as this: increase your assets and decrease your liabilities. However, how you do that is much more complex. Here are some strategies for building wealth and improving your net worth:
Pay Off Or Pay Down Debt
The basic rules of subtraction tell us that the less you take away, the more you have. Therefore, the fewer liabilities (debts) you have to take away from your assets, the more net worth you’ll have. Here’s an example:
$100,000 assets – $50,000 liabilities = $50,000 net worth
$100,000 assets – $25,000 liabilities = $75,000 net worth
$100,000 assets – $0 liabilities = $100,000 net worth
As you can see, it pays to pay off or pay down your debt. To get rid of your debt faster, try paying more than the minimum payment each month or making extra payments when you can. You may also want to try the debt snowball or avalanche methods or consider debt consolidation.
Increase Your Income
Increasing your assets is another way to improve your net worth. One quick and easy way to do this is by increasing your income. Ask for a raise or work your way to a promotion. Take on a side hustle, sell your stuff or rent out a room in your home. You can also earn income by investing your money in stocks, bonds and mutual funds.
Open A Retirement Account And Hit Your Company’s Match
Retirement accounts typically make up a good chunk of someone’s net worth. They are also necessary for a sustainable retirement. A 401(k) allows you to contribute money to a savings account. The idea is to save this money to use when you retire. The benefit of this account is that the money you put into it comes out of your paycheck before taxes are taken out. The money in your 401(k) is not taxed until you withdraw it.
A Roth IRA is another retirement savings plan that allows you to contribute money to an account, but after taxes. The benefit of this account is that as long as you are 59½ years old or older and have the account for 5 years, you will not be federally taxed on the money you withdraw from it.
Some financial advisors recommend opening 401(k) and Roth IRA accounts to reap both kinds of tax benefits.
Many companies will even match your contribution up to a certain amount. That’s free money! To get the most from your company’s match, contribute enough money so your company match is maxed out each year.
Cut Your Spending
The less money that leaves your wallet and bank account, the more valuable those assets will be. A few ways to cut your spending are to create a budget, use coupons and discount codes, cancel subscriptions and reduce the number of times you eat out. You can get even more tips by reading our post on how to save money.
Purchase A Home
A home can be a significant addition to your net worth in a healthy housing market. Just remember that it can also be a substantial liability when you first purchase it if you have a mortgage. You will need to give this asset time to grow in value as you pay down your mortgage and as the home appreciates. However, you should not purchase a home just to increase your net worth. Houses are a big commitment and a big financial undertaking. If you are not ready, it could cost you in the long run.
Make Sure You’re Insured
Insurance helps cover the astronomical costs of such emergencies as medical crises, auto accidents or damages to your home. If you don’t have insurance, you’ll be responsible for paying the full amount of these expenses, which can put you hundreds of thousands of dollars in debt.
Build An Emergency Fund
An emergency fund is kind of like a back-up insurance plan. It can help cover you financially when the unexpected happens. This could be job loss, home repairs or emergencies not covered by insurance. Your emergency fund will keep you from dipping into or selling your other assets when the unexpected happens. Try to accumulate enough money in your fund to cover 3 – 6 months of living expenses.
Avoid Taking On More Debt
The more debt you take on, the more you will decrease your net worth. Avoid taking on more debt by only buying what you need, paying cash for big purchases and refraining from opening new lines of credit.
Seek Financial Advice From A Professional
Before making any big financial decision, you should speak to a financial advisor who can help you create a custom plan based on your financial situation and future goals. If you have a negative net worth, it may help to speak to a financial professional who can provide assistance based on your individual needs.
Frequently Asked Questions About Net Worth
Looking for quick answers to questions about net worth? Here are the most frequently asked questions and answers that provide a quick rundown of what we just covered:
What Factors Make Up Net Worth?
Assets (what you own) and liabilities (what you owe) are the factors that make up net worth. Assets are those items you own that have a monetary value. Your liabilities are any debts you have.
How Does Net Worth Change Over Time?
Your net worth will change throughout your life. Since it is based on your assets and liabilities, it will change whenever those factors change.
Does Buying A Home Increase Net Worth?
Buying a house can increase net worth, but not necessarily right away. If you purchase a home with a mortgage, it will not increase your net worth until you pay down the mortgage and build equity in the home. You may also have to wait for your home to appreciate in value, which can take a few years. It also depends on the housing market. If housing values ever take a dive, you may end up owing more than your home is worth.
Do You Include 401(k) In Net Worth?
Yes, the money in your 401(k) is your money and should be included in your net worth. In fact, retirement accounts make up a large portion of net worth.
If you’re working on building your net worth and want more information, check out more of our posts on finance. You’ll find tips for saving money, advice on dealing with debt and ways to increase your income.
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