How To Calculate Your Net Worth
We have all looked up the net worth of our favorite athlete or celebrity, but have we spent the time calculating our own? Your net worth is a great indicator of your overall financial health, so it is worth spending some time doing the math at least once a year.
In this post, we’ll show you how to calculate your net worth, how it compares to your peers, and 3 ways to improve it.
What is Included in Net Worth?
Net Worth is all of your assets minus all of your liabilities. Assets are the things you own, such as money in the bank, your house, and investments. Liabilities are what you owe, including your mortgage, credit card debt, and student loans.
Why is Your Net Worth Important to Know?
Net Worth is a snapshot of your financial situation in one number. A positive net worth means that you have more assets than liabilities, a negative net worth means the opposite.
Getting crystal clear about your financial situation is the first step to making plans about where you want to go. Unfortunately, many people are not clear about their financial situation. According to a study by US News, one in five Americans don’t know whether they have credit card debt. And 30% of those who did have credit card debt, weren’t sure how much interest they are paying per month. Calculating your net worth will give you the opportunity to record all of your accounts and debts in one place and have a clear understanding of where you stand.
The Net Worth figure gives much more insight than other financial numbers. You may have a very large savings account balance, and think you are in a good place financially, but if you are drowning in debt your net worth figure will be significantly lower, and rightfully so.
Tracking your net worth over time will give you feedback on how your finances are trending. You may want to come back to this post and calculate your net worth at least annually. There is nothing more rewarding than watching it slowly rise over time as you better budget, save, and invest your money.
How To Calculate Your Net Worth
Having organized records will speed up this net worth calculation. You will need multiple account balances and estimates. If your records aren’t organized yet, now is the perfect time to start. Check out our blogpost on organizing your finances.
You can calculate your net worth by writing everything down on a blank piece of paper, but this worksheet will help you do the math and also ensure that you don’t forget anything.
First, let’s calculate the value of your Total Assets. Fill in all your Cash and Cash Equivalents. This includes checking, saving, and money market accounts.
Next, look up the balances of your Invested Assets. This includes retirement accounts such as IRA’s and 401(k)’s. Even though the money in these accounts will stay there until you retire, you still account for it in your net worth.
Finally, fill in your Use Assets. These are assets such as your home, jewelry, and anything else that you didn’t include yet. When it comes to Use Assets, estimates are fine. For the value of your home, you can use Zillow to get an estimate quickly and easily.
Now the worksheet will add everything up for you and give you your Total Assets.
Next, it’s time to add up your Liabilities.
First, we will look at your Current Liabilities. “Current” is an accounting term that means short-term. Here you’ll put your credit card debt, as well as tax or bills you owe. If you are using the worksheet, make sure you input all of your liabilities as positive numbers.
Next, we will input all of your Long-Term Liabilities. This is where you put your mortgage balance, student loans, and any other long-term debt you have.
When it comes to your debt guessing and estimates isn’t advised. If you don’t know the exact balance you owe, look it up. While you are at it, if you don’t know other numbers such as your monthly payment, or interest rate, look them up too and make a note of them for yourself. Now worksheet will add up all your liabilities and give you your Total Liabilities. Then it will subtract your Total Liabilities from your Total Assets giving you your Net Worth. Congratulations!
Examples of Net Worth Calculations
The following examples will show you some net worth calculations, as well as some of the uses and limitations of using your net worth number to make decisions.
Student Stacey
Stacey just graduated from USC. She studied Computer Science and was able to land a 6-figure job right out of college! With all this new money that will be coming her way, Stacey is thinking about what she should buy first. Maybe a new car? Let’s calculate her net worth to help her decide.
Stacey has:
$3,000 in savings.
$0 in investments.
$155,000 in student loan debt, 4.9% interest rate
$15,000 of credit card debt, 29.9% APR
Stacey’s net worth is: 3,000 + 0 – 155,000 – 15,000 = -$167,000
Even though Stacey is going to have a lot of new money coming in, she may want to hold off on upgrading her lifestyle. A negative net worth means you have more debt than assets, and if she were to lose her job, she would probably struggle to pay off her debt. Instead of a new car, Stacey should be looking to pay off her high interest debt, and building up the balances in her saving and investing accounts.
Illiquid Ian
Ian is just 41 years old and has done very well for himself over the years. He makes $350k a year, but is thinking about retiring soon. Ian decides to calculate his net worth to see where he stands financially.
Ian has:
$100,000 in savings and checking accounts
A home that Zillow estimates is worth $3.5 million
$2 million in retirement accounts, including an IRA and 401(k)
The only debt Ian has is a mortgage with a balance of $1.5 million and monthly payments of $9,000
Ian’s net worth is: 100,000 + 3,500,000 + 2,000,000 - 1,500,000 = $4,100,000
That’s a pretty big number, he can probably retire right now if he wanted to, right? Not so fast. This example shows one of the limitations of using your net worth alone to make decisions. Just because Ian’s net worth is over $4 million, doesn’t mean he has $4 million to spend. Most of his net worth is in his home equity and retirement accounts, so Ian should also consider his Liquid Net Worth. Liquid Net Worth is the same as net worth except it only considers your liquid assets (assets that can easily be turned into cash if needed).
Ian only has $100,000 of liquid assets: the money in his savings and checking accounts. The $2 million in equity he has in his home isn’t liquid because he would have to sell or refinance to actually receive the cash. Retirement accounts are generally not considered liquid because withdrawing money from them before 59 ½ years of age would incur hefty penalties and taxes.
After calculating your liquid assets, arrive at your liquid net worth by subtracting one year of payments on your debt. Ian’s mortgage payment is $9,000 a month. 9,000 x 12 = $108,000.
So Ian’s liquid net worth is: $100,000 - $108,000 = -$8,000
Ian has done extremly well for himself, but it may not be as easy to retire as his net worth suggests. This isn’t to say that he can’t retire if he wants to. Ian has a lot of options, but he shouldn’t be fooled by his $4 million net worth.
When you calculate your own net worth, remember that it shouldn’t be the only thing you rely on to make decisions. Consider your entire situation, including how easy it is to access your illiquid assets.
How Do You Compare?
Once you have calculated your net worth, you are probably wondering how it compares to your peers. The Federal Reserve releases a Survey of Consumer Finances every three years — the most recent report was issued near the end of 2020 with numbers collected in 2019. The following charts show the median net worth of US families, broken down by income and age.
Net Worth Of U.S. Families by age
Net Worth of U.S. Families by income
3 Ways To Improve Your Net Worth
Tracking your net worth number over time is great feedback on how you are doing financially. Here are 3 ways to increase that number.
1. Pay off your high interest debt
Liabilities bring down your net worth. When you pay them off your net worth increases. Monthly payments on your debt also suck up a portion of your income each month, money that could be saved or invested instead.
If you have any debt with a high interest rate (such as credit card debt) make a plan to pay it off faster. You can use a debt payoff calculator to see how much sooner your debt will be paid off (and how much money you will save) if you start paying more than the minimum each month.
2. Set up automatic saving and investing
It’s hard to stick to habits such as saving every month. One of the ways to make yourself stick to a habit is to do it automatically! Set up an automatic transfer to your saving or investing account for the day after you get paid. Not sure how much to do? Start with 20%. You can always adjust later if that is too much or too later. To learn more about how to automate your finances check out our blogpost here.
3. Be patient
If you are doing the two steps above, your net worth will gradually increase over time. There is no secret to getting wealthy. Pay off your debt, spend less than you earn, invest the leftover, and be patient.
Conclusion
Your net worth gives a nice snapshot of how you are doing financially. But as we have seen, it shouldn’t be the only thing you rely on to make decisions. To help calculate your net worth, download your net worth worksheet here. And if you had a hard time finding all of the numbers for your net worth calculation, it might be time to finally organize all of your finances. We have a great blogpost with another helpful worksheet right here or check our the rest of our posts on our blog for more helpful content.