Net worth refers to the value of the assets a person owns, minus the liabilities they owe. In essence, it’s a way to get a quick snapshot of where your finances stand at any given moment, while also helping you track your progress towards your financial goals.
In addition to individuals, net worth can be applied to corporations, sectors, and even countries.
Throughout the years, net worth has also become a fixation of popular culture, with lists ranking high-profile individuals based on the value of their net worth.
How to Calculate Your Net Worth
To calculate your net worth, add up all of your assets, and then add up all of your liabilities. Once you have those two numbers, subtract your liabilities from your assets. That number is your net worth.
Assets – Liabilities = Net Worth
Assets are the things you own. They are items of value, as well as items that can potentially provide income down the road.
Examples of assets include:
- Real estate: Home, second homes, undeveloped land, rental properties, commercial buildings, etc.
- Automobiles/vehicles: Vehicles owned, including RVs, campers or collectibles.
- Bank account values: Checking and savings.
- Investment account values: Stocks, bonds, mutual funds, savings bonds, etc.
- Retirement account values: IRAs, 401k savings, SEP IRAs, variable annuities, etc.
- Household items: Furniture, fine art, home electronics, silverware, antiques, etc.
- Jewelry: Gems, precious metals, diamonds, etc.
Liabilities are what you owe to others.
Examples of liabilities include:
- Mortgage principals.
- Auto loans.
- Student loans.
- Credit card debt.
- Personal/other loans.
- Medical debt.
- Back taxes and liens.
What if You Have a Negative Net Worth?
A negative net worth results if your total debt is more than your total assets. For instance, if the sum of your mortgage, vehicle loan, credit card debt and student loans outpace the total value of your cash and investments, your net worth will be a negative number.
Having a negative net worth is a sign that an individual or family needs to focus their energy on debt reduction. Creating a strict monthly budget, or utilizing a debt reduction plan – or even working to negotiate some of the debt down with creditors – can help people climb out of this position.
Related: “Good Debt” Versus “Bad Debt”
However, it’s worth noting that in early life, a negative net worth is more common – especially if you have student loans.
How to Use Your Net Worth
Your net worth can be a useful tool for benchmarking. It can help you understand where your finances stand today as compared to a year ago, in addition to where your finances stand today as compared to where you want to be in a year.
That being said, it’s important to calculate your net worth on a regular basis and record the number. Whether that be measuring your assets vs. liabilities on the first of every month or quarterly, make sure you’re doing it at the same time in the cycle so you can ensure you’re comparing apples to apples.
Knowing your net worth can help you make informed decisions about things like investing, saving and budgeting.
If you’re interested in working with a financial advisor to improve your net worth and financial standing, our team of financial advisors are always here to help. You’re welcome to schedule a complimentary consultation with us below, whether it be to answer a question you have or help you long-term.