what is net worth

What Is Net Worth And Why It Matters

If you are wondering why your net worth matters, you aren’t alone. We get asked all the time what the term net worth means and why it even matters.

The concept is more simple than it sounds and is straightforward to calculate.

To begin, net worth is strictly a financial term. The name is vague and broad and it means absolutely nothing about your self-worth or your value as a person, so no need to worry about that.

What Is Net Worth?

The simplest definition of Net Worth is: the value of the things you own.

The “net” part simply means free of reductions. For example, when you look at your pay stub, you’ll notice is says ‘Gross Pay’ and ‘Net Pay’. The difference between the two, is simply the deductions that come out of your pay, like taxes.

The word ‘net’ is used the same way in net worth.

Therefore, net worth is simply the value of everything you own, once you account for reductions, which in this case is your loans and debts.

Why Does Your Net Worth Matter?

Your net worth matters because it is an easy, fast way to measure your financial health. It’s similar to when you go to your doctor and they check your blood pressure. It’s a simple test, but it can quickly alert you of potential underlying problems. In this case, money problems.

It’s possible to have normal blood pressure and still be unhealthy, and the same applies to your net worth. Having a high net worth doesn’t always mean the coast is clear. But it’s a good indicator.

If you earn $45,000 a year, have worked for 15 years, but only have a net worth of $5,000, it’s clear that you haven’t been able to save enough to establish a solid foundation for yourself.

The same thing applies to someone who earns millions of dollars but only has a net worth of $1 million. For example, most of us could hardly dream of having a net worth of $15 million, but if you were LeBron James, you’d have serious problems since he’s earned 100s of millions of dollars over his career.

Your net worth also serves as a simple approximation of your wealth, so it can help you track your progress as you save and work hard to reach your financial goals.

What’s A “Good” Net Worth Number?

It depends.

One of our favorite books about money is The Millionaire Next Door. If you plan to become a millionaire, you need to read it ASAP. We also love the book’s simple benchmark for your net worth.

It has a simple formula for a net worth value you should shoot for, which is:

Net Worth Target = Age X Pre-Tax Income / 10

All you have to do is take your age, multiply it by your pre-tax (gross) income, and divide by 10.

If you are 24 years old, and have a salary of $50,000 this benchmark says you should try to have a net worth of $120,000.

If you started working at 22 years old, you haven’t even earned $120,000 in salary, so clearly this benchmark isn’t perfect. However, you can still forecast what your net worth target should be by the time you are 30 years old ($150,000 assuming no increase in income), so that you know what to aim for.

If you aren’t even close to this, you need to make sure you create and stick to a budget, increase your income, and focus on paying down your debt. If your net worth is 2x higher than the net worth target, then you are doing a great job, but don’t let off the gas.

Protip: If you don’t have a monthly budget, here’s an amazing step-by-step guide to walk you through the simple process.

How To Calculate Your Net Worth

To calculate your net worth you have to add all of the things that you own (financial assets) and subtract your loans and debts (financial liabilities).

Net Worth = What You Own (assets) – What You Owe (liabilities)

Depending on who you ask, they’ll have you include different items in both categories, but we limit your assets and liabilities to the following things:

Your Financial Assets

  • Total of your checking and savings accounts (including your emergency fund)
  • Total of any retirement accounts you have (401Ks, Roth IRAs, etc.)
  • Other Investment Accounts (stocks, options, 529 Plans, etc.)
  • Total of the current value of any real estate that you own (including primary, vacation, or investment properties)

Your Financial Liabilities

  • All real estate mortgages
  • Total of your loans (personal loans, home equity loans, car loans, student loans, etc.)
  • Total credit card balances
  • Large outstanding bills you haven’t paid, but owe (like property taxes, hospital bills, etc.)

Use Our Net Worth Calculator

The easiest way to quickly calculate your net worth is simply to use our net worth calculator.

Net Worth Calculator

How To Find What Your House Is Worth

For many of you, your house will be your largest asset (and liability!) and it has a large impact on your net worth. If you have no clue what the current market value of your house is, here are a few tips.

  1. To get a conservative estimate of the value of your home, you can find what your local county lists as the appraised value. This value is usually going to be lower than the actual market value of the property, but it’s better than nothing.

    Simply Google search: “[the county your property is in] assessor property”. For example if you live in Orange County, CA your Google search would be “Orange County assessor property”. The first site in the search results is usually exactly what you are looking for. You can then search by address and see the property value used to assess property taxes. This is all publicly available information, and many people don’t realize it exists.

  2. You can also search the websites of Zillow, Trulia, Redfin, and Realtor.com to get a general idea of what they estimate your home to be worth.
  3. Lastly, you can contact a broker in your area and see if they can provide an estimate. Unless you are planning to buy or sell, it’ll kind of be a waste of their time, but it’s always an option.

What About The Other Things I Own?

You probably noticed that we included car loans in liabilities but not in the assets. This is because we don’t include the values of things that will quickly lose value and eventually be worth nothing. Unless you have valuable antique furniture, jewelry, or artwork that has a substantial value and has recently been appraised, don’t include it here. These things often don’t get sold, are hard to value, and are not liquid (meaning they can’t be converted to cash quickly).

Another asset that isn’t listed is a life insurance policy. If you have a whole life insurance policy (protip: you’d probably be better off with term life insurance instead) you can add the cash surrender value of the policy to your assets, otherwise don’t include it in your net worth. If you aren’t sure what the cash surrender value of your whole life insurance policy is, you can contact your agent or review your policy information.

Expect to receive an inheritance? DON’T include it. It’s EXPECTED so it’s not guaranteed and until it’s in your hands, it’s not yours.

How Often Should I Calculate Or Track My Net Worth?

We recommend setting a net worth goal and tracking your net worth every 6 months to check your progress. It can serve as a motivator to see your wealth build.

Some online tracking apps like Mint have a net worth tracking function so you can check it on-demand. Just remember that the net worth is simply an output that measures your financial health.

In a way, it’s like checking your weight on a scale. Maintaining a healthy body weight is an output of smart dietary and fitness related decisions. Knowing your weight is a good starting point, but it doesn’t mean you are healthy. The important part is realizing that you still have to put the work in to reach your goals.

An Example Of How To Calculate Net Worth

We recently had a reader ask us to help calculate her Net Worth. We asked her to give us all of the current balance on her financial accounts, loans, and other financial details. She said we could share her stats anonymously, so let’s refer to her as Madison here.

Madison is a married 41 year old dentist with two children. Her husband works as an account manager at a public relations firm.

Here’s the details about what they own. They’ve been able to save $52,000 in cash and savings, they have $310,000 in retirement savings (including both 401Ks and IRAs), they also have saved $75,000 in 529 plans to help pay for their kids’ college, and live in a house that they bought for $495,000 but is now worth $525,000. They also own a rental property that is valued at $190,000.

Assets = $52K (cash & savings) + $310K (retirement accounts) + $75K (Savings for kids’ college) + $525K (house) + $190K (rental property) = $1,152,000

Here’s the details about what they owe. The balance on the mortgage on the house they live in is $360,000, and the balance of the mortgage on their rental property is $130,000. They’ve been able to pay down $150,000 of student loans and their remaining balance is $48,000. They have credit card debt totalling $4,500. For their cars, their loan balances are $12,000 for a Honda CRV and $20,000 on a Lexus RX. Finally, they owe $12,500 to finish paying for the new pool at their house.

Liabilities = $360K (mortgage) + $130K (2nd mortgage) + $48,000 (student loans) + $4.5K (credit card debt) + $12K (car – CRV) + $20K (car – Lexus) + $12.5K (pool) = $587,000

Net Worth = $1,152,000 – $587,000 = $565,000

What Their Net Worth Tells Us

A net worth of $565,000 seems like a lot. But is it enough, given their situation? Let’s find out.

The couple has a combined pre-tax (before tax) income of $255,000 per year.

Using the rule from above, we can take Madison’s age (41), multiply by $255,000, and divide that total by 10 to see a net worth target of $1,045,500.

Yikes, their net worth of $565,000 is only about half of where it needs to be. They still have plenty of working years ahead of them, so they still have time. This was a huge wake-up call for them though.

This shows us that they have not been saving enough of their income, or that they have taken on too much debt. In this case, it’s a combination of both, but given their high income, the main problem is spending too much.

They need to build a budget (they have never made one) and stick to it. They drive nice cars and go on fancy vacations, but if they don’t start making smart moves with their money, they might not be able to retire as early as they had hoped. It’s clear that they are trying to be rich instead of wealthy.

Now that they know their net worth, Madison says it serves as HUGE motivator for them to get their financial lives in order.

Do you know your net worth?

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