It may seem like checking your bank account balance is the only thing you need to do to measure your financial wellness. In reality, though, that’s only part of the picture. The amount of cash you have on hand doesn’t take into consideration other financial accomplishments, such as the amount of debt you are paying off, the investments you’ve made, or the equity you’ve built in a home.
All of these factors contribute to your net worth and have a major influence on your financial future. Here’s a closer look at the value of tracking your net worth and how to calculate it on your own.
Why Does Net Worth Matter?
Net worth is a reflection of how much money you’d have at your disposal if you were to sell your house, cash out your retirement, pull money from your bank accounts, and pay off all of your debts. Obviously, it is very unlikely that any consumer would be in a position where this would happen—net worth is really more about taking your financial temperature at any given moment.
Unlike retirement planning, which for many consumers involves striving to hit a magic number that represents financial security and comfortable living, net worth isn’t a tool for hitting a financial milestone. Because net worth is influenced by many different factors and doesn’t necessarily reflect your available retirement income, it is best used to track your progress in building wealth over time.
I’m Young. Won’t My Net Worth Be Low?
If you’re young and have a negative net worth, don’t worry: Younger professionals tend to have a lower net worth because they’ve had limited years in the workforce, earn less than older generations, and have taken on multiple forms of debt that still carry high balances.
If you have student loan debt, recently bought a house, and/or have other types of debt such as a car payment, those debts are going to temporarily reduce your net worth. As you pay down those debts, build equity in your home, and increase contributions to retirement plans, savings accounts, and emergency funds, your net worth will continue to grow.
How to Calculate Your Net Worth
Ready to calculate your net worth? All it takes is a few simple steps. Make sure you have access to all of your debts and financial assets, including loan balance amounts, bank account balances, and other financial information used in this calculation.
Then, do the following:
Add up all of your assets.
Assets are things you own outright: cash in your bank accounts, balances in investment accounts, cars that have been fully paid off, and even high-priced items such as boats that have value on the market (in other words, could be resold).
You should also factor in the equity you have in your home; if your house is worth $250,000 and you owe $190,000 on your mortgage, then your asset value is $60,000 on the house.
Add up your liabilities.
This is all of the debt you currently owe: the balance on student loans, car loans, your mortgage, credit cards, and other types of personal debt.
Subtract your liabilities from your assets to determine your net worth.
Remember, if you’re young or still building toward financial wellness, it is normal for this number to be negative in value. The benefit of knowing your net worth is that you can track your progress over time as your wealth builds.
If you use a budgeting app or money management tool, you may be able to enter all of this information into it and track your net worth over time. Use this metric to become more aware of your assets and liabilities, the impacts of taking on debt, and the benefits of putting money into investments, savings, and other vehicles that build value over time.
Growing your net worth takes time and persistence, but sticking to a personalized budget and savings plan can help you push this figure into positive territory. If you’re struggling to set financial goals, track spending, and measure your progress over time, seek out help from a financial advisor who can help you build a practical plan to reach your financial goals.