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In order to get to where you’re going, you first need to know where you are.
In fact, in order to be successful in pretty much any endeavor, you need to know those same two basic things: where you’re starting from and where you hope to end up. It’s these factors that help determine your progress toward a goal and whether or not you’ve achieved it.
If what you want is to retire with $1M, it’s pretty important to know what your money situation looks like currently, right?
This is why it’s important to know how to calculate your net worth and to do it regularly. You can create a formal net worth statement -essentially the personal version of the balance sheet – or you can grab some scratch paper and a calculator. Either way, knowing your net worth is key to taking control of your finances. Your net worth number provides a snapshot of your financial situation at any given time and acts as “status report”. Since your net worth is a critical measure of your overall financial health, it’s a number you should be intimately familiar with. You can think of it as a baseline that you can compare your future progress to and as a way to see how far you’ve come.
Determining your net worth should be the very first step you take toward assessing your finances and building better money habits.
Net worth explained
Your net worth is simply the difference between all of your assets (what you own) and all of your liabilities (what you owe). It tells you how much you would have left over if you were to pay off all of your debts. Ideally, your net worth will be a positive number – the higher the better – but it’s not uncommon for it to be negative instead.
A negative net worth means that you owe more to your lenders and creditors than you can actually repay. This could be the result of being young with a low to moderate income combined with student loans, or could be the result of poor financial decisions and too much over-borrowing.
A positive net worth on the other hand, especially one that is consistently increasing over time, is a clear indicator that you’re doing something, or several things, right with your money.
Your net worth calculation is the ideal way to track changes in your finances, from month to month and from one year to the next.
Calculate your net worth
1. List your assets
First, you’ll want to list all of your assets – this is the fair market value of everything you own. In order to get the most accurate net worth results, it’s important that you list assets at their fair market value – or the price a willing buyer would currently pay – and not use the price you actually paid for an item or the price you think it is worth. Include all relevant monetary, investment and tangible assets.
Monetary assets such as:
- Cash, including the total amounts in your savings and checking accounts as well as any cash you have on hand
- Money owed to you. This can be from family or friends, a tax refund, etc.
Investment assets such as:
- 401K, IRA, or any other retirement account
- Taxable brokerage accounts, including stocks, bonds and mutual funds
- Life insurance if it includes cash value
Tangible assets such as:
- Cars, trucks, motorcycle, bicycle, boat, etc.
- Your home, any rental properties, etc.
- Furniture and appliances
- Any other “big ticket” items
2. List your liabilities
Next, you’ll list all of your liabilities. Your liabilities include any and all money you owe to others – in other words, your debts.
Include balances from:
- Credit cards
- Auto loans
- Student loans
- Personal loans
- Tax debt
- Unpaid medical bills
- Any other debts you owe
3. Subtract total liabilities from total assets
Finally, you’ll subtract your total liabilities from your total assets. When you subtract what you owe from what you own, the difference is your net worth. Like I mentioned before, your net worth may be positive or it could be negative – the important thing is that you begin to track it and make sure that it is always trending upward. The higher your net worth, the more stable and secure your finances are and the more likely you are to reach your financial goals.
Calculate and track with an app
Both are fantastic, absolutely free apps that allow you to connect all of your accounts so you have a consolidated way of tracking your spending, savings, loans, etc. This lets you see all of your transactions across all accounts – checking, savings, investments, mortgage, credit cards, etc. – in one place, quickly and easily.
Both Personal Capital and Mint automatically calculate your net worth for you based on the accounts you have synced and any additional information you provide. For example, in Mint you can add a home or vehicle you own by its value so it can be included in your net worth calculation even if you aren’t actively paying on a loan or mortgage. You can also exclude certain accounts if you want (i.e. I track my daughter’s account because she’s a minor, but exclude it from my net worth number). In addition, they both provide tools to track your net worth over time to see how it’s changed.
Median and average net worth by age
Comparison is the thief of joy, or at least that’s how the saying goes. In any case, comparing your net worth to the net worth of others really isn’t all that useful. Personal finance is just that – personal. Instead, it’s much more beneficial to track your current net worth against your past net worth so you can stay on top of your financial progress.
That said, comparing where you are to where others are does give you a broad overview of how well you’re faring against your peers – again, not very helpful, but it can be interesting to see, especially considering that most American’s have too little savings and aren’t putting away enough for retirement. Since I know you’re curious, here are the median and average net worth by age according to the most recent Federal Reserve Survey of Consumer Finances (based on 2016 numbers):
- Under 35: Median – $11,100 (average – $76,200).
- 35-44: $59,800 ($288,700).
- 45-54: $124,200 ($727,500).
- 55-64: $187,300 ($1,167,400).
- 65-74: $224,100 ($1,066,000).
- 75+: $264,800 ($1,067,000).
How to increase your net worth
Increasing your net worth, at least in theory, is simple. You can 1) reduce or eliminate your debt; 2) increase your assets; or 3) do both. You should always be actively working to do one or more of these in order to improve your finances.
Every debt that you pay off or reduce means an increase in your net worth. Every time one of your assets increases in value, your net worth increases as well. The best way to increase your net worth is by paying off your debts, saving more money, spending less and investing more.
More than anything, you want to avoid sending your net worth in the wrong direction by taking on more debt or by wasting money that you could be saving on items and assets, especially depreciating assets, that don’t improve your bottom line.
Questions? Advice to share? Let me know in the comments!