Matt Soladay
Net Worth helps us assess our financial health, but most of us don’t track it, and some might not even know how to calculate it. The average person is more likely to use the term ‘Net Worth’ when Googling famous, wealthy people on the internet than figuring out their own. To calculate your Net Worth, add up all your assets, and subtract all your debts.
In This Article
Assets – Debts = Net Worth
An asset is cash, items, or investments that can easily be sold for cash. The most common assets are the funds in your financial accounts (banking, investment, retirement, etc.), and real estate equity. Also included could be valuable collector’s items like art or jewelry. However, don’t include items that you are not willing to sell, or that have little to no value.
Debts are money you owe, such as school, personal, car or home loans, and credit cards.
How To Calculate Your Net Worth
Click here to download a financial baseline document that will help you calculate your Net Worth. All the formulas are included; you just have to input your data. Note that your home is an example of an item that could be both an asset and a debt.
In the above example, the Net Worth is $218,000. Keep in mind that your Net Worth will change over time, as it is not a fixed number. So, if your Net Worth is negative or not as high as you would like, it doesn’t mean you are in a bad financial situation. When you get out of school or training, it is likely you have a negative Net Worth since you may have loans in excess of your savings. As you eliminate your loans and add assets over time, your Net Worth will begin to climb.
Income is NOT part of the Net Worth Calculation
A common misconception is that your income is directly related to how wealthy you are. That is not necessarily the case because even though high-income results in larger paychecks, it doesn’t mean you have accumulated assets. You could be spending the majority of your income on large debt payments and an expensive lifestyle. The result could be a very low Net Worth compared to your yearly salary.
Why Net Worth is Important
On a day to day basis, we don’t liquidate or sell assets to pay for our regular expenses. We use our income for that. However, if your income is reduced because you took a pay-cut at work or lost your job, you have the option to draw money from your savings, banking, or investment accounts until you can replace your income. Otherwise, you would be forced to borrow money to cover your essential expenses. The same thing happens in retirement, except that it is planned and is on a much bigger scale. In retirement, you live off your assets not for a short while, but for the rest of your life.
Financial progress involves increasing your Net Worth over time. It does not matter what income tax bracket you are in, or what you do for a living. The key is that the rate in which you accumulate assets and eliminate debts is compatible with your financial goals.