We’re intrigued by the net worth of celebrities, business magnates, politicians and sports heroes. But knowing our own net worth can be useful for us mere mortals, too.
It may seem like figuring out your own net worth isn’t worth the trouble. But because of the insight it can give you into your financial health, it’s valuable information to have. Here’s how to get that info.
What Is Net Worth?
Your net worth is the number you’re left with once you subtract all your debts from your assets.
And how should you define assets?
“Assets are anything that can be sold for cash,” says Jonathan Bird, a certified financial planner who runs Farnam Financial in Phoenix. “To understand what you have in assets, look at the value of what you own. Items such as cash, stocks, bonds, cryptocurrency, your primary home or other real estate.”
As for defining your debts, Bird says that would cover “anything that obligates you to pay cash out. To understand what you have in debts, look at the value of items such as student loans, credit card debt, car loans, mortgage loans or home equity lines of credit.”
Why Is It a Good Idea to Know How to Determine Net Worth?
It’s all about gaining knowledge about your own finances.
“Knowing your net worth is critical to understanding your overall financial health and ensuring you’re on track to meet your financial goals,” Bird says.
“Your net worth can indicate whether or not you’ll enjoy a comfortable retirement. It can also help you keep track of your financial progress, or lack thereof, from year-to-year,” says Lamar Brabham, CEO and founder of Noel Taylor Agency, a financial services firm in North Myrtle Beach, South Carolina.
“You can view it as a barometer of sorts that helps identify where your money is being spent and how that spending is impacting your financial position,” he adds.
How to Calculate Net Worth
The net worth formula isn’t complicated. Simply add up all of your assets. Then, subtract your total debts from your total assets.
Jeff Busch, a financial advisor and owner of Elysium Financial in Riverton, Utah, recommends including your home equity in your net worth.
“Many people leave this out of the equation and feel a little discouraged when looking at the final number,” he says. “Adding in your home equity might help you see that you are much closer to the elusive million-dollar mark than you thought you were.”
[Related:Are You a Mini-Millionaire?]
There are some nuances you might want to be aware of, however, if you try and calculate your net worth. For instance:
You may want to separate your net worth from your home. Busch says that if you’re going to live in your home for much of your retirement, it’s worth calculating two net worth figures: one that tracks your overall net worth and one that tracks only your retirement assets. He says you don’t want to give yourself a false sense of security by including your home equity in your net worth if you’re saving for retirement and plan on staying in your home.
You may want to calculate your net worth and your liquid net worth.“Net worth can include items such as your home, jewelry, collectibles and other items of value that can be turned into cash, but not immediately,” says Rob Burnette, a financial advisor and the CEO of Outlook Financial Center in Troy, Ohio.
He says that all falls under illiquid net worth and if you’re going to sell those assets it can take some time.
You can sell other assets a little faster.
“Liquid assets like cash, stocks, bonds, mutual funds, etc., are typically convertible into cash in three days or less,” Burnette says. “Some folks find they are asset rich with a significant amount of illiquid assets, but they are cash poor according to their checking and savings account.”
So, if you have a lot of wealth, you might want to distinguish between liquid and illiquid assets.
You should calculate your net worth on a regular basis. Maybe once a month, maybe once a year. Whatever feels right. But you should do it regularly, Burnette says.
“Calculating your net worth gives an indication of your financial health at a specific point in time. The real usefulness of the net worth calculation is to perform it on a regular basis to measure progress toward your personal financial goals,” he adds.
What Is Future Net Worth?
What is your future net worth likely to be — or what do you want it to be? And more important, how do you get there?
[Related:Are You Rich? How the Wealthy Are Defined]
Here are some ideas for building your net worth:
Spend less and make more. That’s what Andrew Wang, managing partner at Runnymede Capital Management in Mendham, New Jersey, advises.
Keep an eye on your spending. “While many financial advisors and coaches are quick to suggest budgeting, I find the easier path is to simply start tracking your spending,” Wang says. “Most people know how much money they make, but too few know where they’re spending money every month.”
He says that he has seen it time and time again: When people start tracking exactly how they’re spending their money, they start making changes and saving more.
[READ: Hate Budgeting? Here’s How to Reframe It]
Ask for a raise. Considering uncertainty about the economy, this may feel like a tough reach. But Wang suggests doing so if you feel that you can.
Pay down debt. If you reduce your debt, whether it’s student debt, credit card debt or a car loan, you’ll raise your net worth. “A side hustle can generate extra income to help pay down debt,” Wang says.
Talk to your family about your money goals. “Families that I’ve seen make the biggest turnarounds have on thing in common: great communication,” Wang says. “They openly talk about money and set goals.”
Invest. If you are saving money, you can invest, Bird says. “If you have a sufficiently long time horizon, consider investing in an S&P 500 index (fund) with minimal fees,” he says.
An easy and smart way to invest in index funds and other securities is through a tax-advantaged account such as an 401(k) or an IRA.
The Bottom Line
The important thing is that you track your net worth in some meaningful and consistent way. If you do it at least annually, you’ll be able to track your financial progress from year to year.
Even if you come away concluding that “not worth” describes your finances more accurately than “net worth,” it’s still useful to know so you can take action to set things right.
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How to Calculate Your Net Worth originally appeared on usnews.com
Update 09/26/24: This story was published at an earlier date and has been updated with new information.
