Net worth — it’s a term you associate with celebrities, business moguls, and top athletes. But have you ever wondered what your net worth is?
Net worth isn’t just for the uber-wealthy. It’s also helpful to figure out where you stand financially. US News My Money explains what net worth means and how to calculate yours.
What Does Net Worth Mean?
According to US News My Money, “your net worth is exactly how much you’re worth once you subtract all your debts.” For those who are eyeballs deep in debt and have few assets, determining net worth can be a humbling experience.
But what are assets, exactly?
“Assets are anything that can be sold for cash,” certified financial planner and operator of Phoenix-based Farnam Financial Jonathan Bird explained. “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.”
He added that debts are “anything that obligates you to pay cash out. To understand what you have in debts, look at value of items such as student loans, credit card debt, car loans, mortgage loans or home equity lines of credit.”
According to Bird, finding your net worth is “critical to understanding your overall financial health and ensuring you’re on track to meet your financial goals.”
Those goals could be anything — a new house, a dream vacation, or retirement. Jeff Busch, a partner at Utah-based Lift Financial, told US News My Money, “Calculating your net worth is an extremely important part of retirement planning. I think most people are too casual when planning and making goals for retirement.”
How To Find Your Net Worth
Calculating your net worth is easier than you think. As we mentioned earlier, you start by totaling your assets. Then you calculate your debts. After that, you deduct your debts from your assets — and that’s your net worth.
Busch suggests adding your home equity in your calculations. “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 will help you see that you are much closer to the elusive million-dollar mark than you thought you were.”
Of course, it depends on the value of your home, but regardless, home equity is a key element of net worth.
But Busch warned that if you plan on staying at home for the majority of retirement, you should find two net worth calculations: one for your whole net worth and one for your retirement assets. That’s because you don’t want to give yourself false comfort by adding your home equity to your net worth if you’re saving for your golden years and won’t put your house on the market.
What Is Future Net Worth?
It would help if you also learned how to find your future net worth and figure out how to reach the amount you have in mind.
Reaching this goal can be frustratingly difficult in reality, but on paper, it’s easy as pie. You already know how to increase your net worth, but like exercising or sticking to a diet, it’s never that easy. Not only that, not everyone has the same advantages that make growing net worth easier.
Here are a few tips to increase your net worth:
Reduce Expenses, Raise Income
Andrew Wange, New Jersey-based Runnymede Capital Management managing partner, said, “The best way to build net worth is to spend less and make more.” While it seems like common sense (it is), boosting your net worth is really that simple.
Track 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 added. “Most people know how much money they make, but too few know where they’re spending money every month.” When you know where your money is going, you’ll know where to make improvements that can boost your savings.
Request A Raise
Right now might not be the best time to ask your employer for a raise, but Wang recommends doing so once things return to normal — especially if it’s been a long time since your last raise and you have a track record of high performance.
Get Out Of Debt
When you pay off various debts, such as your credit cards, student loans, car, house, etc., your net worth increases. “Sometimes a side hustle can generate extra income to help pay down debt,” Wang noted.
Discuss Your Financial Goals With Your Family
Wang also recommends talking to your loved ones about your goals. “Families that I’ve seen make the biggest turnarounds have one thing in common: great communication. They openly talk about money and set goals.”
Bird believes that if you’re already saving, you should invest. “If you have a sufficiently long time horizon, consider investing in an S&P 500 index (fund) with minimal fees,” he said. Consider tax-advantaged accounts like 401(k)s or IRAs since they’re among the most straightforward investment vehicles.
Knowing your net worth is the foundation for reaching future financial goals. You should check your net worth once every year, so you know where you stand. Even if you have more debt to assets, it’s still helpful to know that you have room for improvement instead of avoiding the harsh reality.
- Williams, Geoff. “How to Calculate Your Net Worth.” U.S. News & World Report, U.S. News & World Report, 2 Sept. 2020, money.usnews.com/money/personal-finance/saving-and-budgeting/articles/how-to-calculate-your-net-worth.