published 2022-06-06 13:00:00 2,8 How to Calculate Your Net Worth and Why Knowing It Is Important /content/thumbnails/p-14-net-worth-1-small.webp net-worth When we think about net worth we usually think that it's something relevant only to tycoons and celebrities. Everyone has a net worth, including you. And knowing your net worth will help you with your financial planning.

How to Calculate Your Net Worth and Why Knowing It Is Important

What is your net worth: A man sitting on a pile of coins.

When we think about net worth we usually think that it's something relevant only to tycoons and celebrities. Everyone has a net worth, including you. And knowing your net worth will help you with your financial planning.

What is a Net Worth

Net worth is assets minus liabilities. Your net worth is anything you own minus everything you owe. Sounds simple, but some people come to incorrect estimates because they don't include all of their debt, inflate the value of their assets, or include things that are not assets. Let's review what assets and liabilities are.

What are Assets and Liabilities?

Assets

Your assets are anything you own that can be converted into cash. An asset is your house, money in the bank, retirement funds, investment portfolio, vehicles, or even jewelry and collectibles.

Liabilities

Your liabilities are your debts. A liability is a car or student loan, mortgage, credit card debt, medical bills, or the money you owe to another person.

How to Calculate Your Net Worth

Net worth = assets - liabilities. You can use this net worth calculator or do it with a pen and paper. Make a list of all of your assets and liabilities. Subtract the sum of your liabilities from the sum of your assets, that is, add up what you own and subtract what you owe. The difference between the total value of your assets and liabilities is your net worth.

Examples of Assets and Liabilities

Assets Liabilities
Cash in the bank Credit card balances
Investments in brokerage accounts Outstanding loans and mortgages
Retirement accounts Unpaid bills, taxes, rent
Real estate Alimony or child support
Personal property Money owed to people

 

What Not to Consider as Assets When Calculating Net Worth

Be conservative with estimates and don't inflate the value of your assets. Improving your net worth on paper may be comforting, but may not reflect your actual financial situation. Remember, how much you paid for an asset doesn't determine its value. Vehicles depreciate rapidly and may not be worth what you think they are worth.

Artwork and jewelry can be considered assets but they must have a market value. Some personal property may be valuable to you but may not have any market value. Don't include anything that can't be sold. Set the value of your assets based on the market value, that is, how much cash you can get for them at the time of calculating your net worth.

Example: If you bought a house for $400,000 and its current market value is $350,000 - the value of this asset is $350,000.

Negative Net Worth

If the value of your assets is greater than your liabilities, you have a positive net worth. It's possible to have a negative net worth, especially if you are young. Negative net worth is when your liabilities are greater than your assets. If this applies to you, you may want to reevaluate your financial plan and focus on working on your liabilities and reducing your debts. This is one example of why knowing your net worth is important.

Why Knowing Your Net Worth Is Important

Besides the obvious benefit of knowing exactly how much money you have and how much you owe, tracking your net worth will help with other aspects of your financial planning.

Calculating your net worth regularly can help understand where you stand financially, at what pace you are progressing, where your money has been moving, and plan where you want it to go in the future.

It Will Help with Financial Planning

Assessing your assets and liabilities can help determine your financial strategies. Knowing the effects of your liabilities on your assets will help you decide whether you want to focus on investing or create a plan to take care of your debts.

It Will Help with Tracking You Financial Progress

Calculating your net worth regularly can help you see how your financial situation changes and whether you are moving in the right direction. The ultimate goal is to increase your net worth as you age. If you find that your net worth isn't growing as fast as you wanted, has stagnated, or started to decrease even if your income is increasing - it may be a sign that you need to evaluate your financial plan. You should consider having different net worth goals at different stages of your life.

It Will Help with Setting New Goals

Your financial situation will be constantly changing. Your net worth may indicate that you are ready for the goals for which you weren't ready before. The new goals can strengthen your financial situation further and accelerate the growth of your net worth.

What is a Good Net Worth to Aim For?

There are several references and rules of thumb for determining net worth goals. Financial rules of thumb aren't real rules and may not be the answer for everyone, but they may point you in the right direction. Here is a reference for net worth goals that should be aimed at each age.

Age Net Worth
By age 30 Half your salary invested and saved
By age 40 A net worth of two times your annual salary
By age 50 A net worth of four times your annual salary
By age 60 A net worth of six times your annual salary

 

Here is another rule of thumb. Your net worth should be equal to your age multiplied by your pretax income and divided by ten.

Example: If you are 35 years old and your annual income is $100,000, then your net worth should be $350,000.

35 x 100000 / 10 = 350000

Average and Median Net Worth of Americans

Average net worth of Americans broken down by age of the head of household. Source: Board of Governors of the Federal Reserve System (US).1

Age of head of family Median net worth Average net worth
Less than 35 $13,900 $76,300
35-44 $91,300 $436,200
45-54 $168,600 $833,200
55-64 $212,500 $1,175,900
65-74 $266,400 $1,217,700
75+ $254,800 $977,600

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References

  1. Board of Governors of the Federal Reserve System (US). https://www.federalreserve.gov/publications/files/scf20.pdf

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