What is your net worth and why is it worth knowing?
"Net worth" is typically a phrase you hear bandied about for celebrities and tech moguls. But it is actually a number worth knowing for anyone — regardless of career status or wealth.
"Tracking your net worth over time is a helpful indicator of your financial stability" in that it can "help you understand where your money has gone in the past vs. where you want it to go in the future," said CNBC Select. Essentially, calculating your net worth is a good exercise in taking stock of your total assets, and then comparing that against your debt obligations, whether it be outstanding student loan debt, a mortgage or a credit card balance.
What is net worth?
A person's net worth is "the value that's left after subtracting liabilities from assets," said Investopedia. In even simpler terms, "you can think of net worth as everything you own less all that you owe," said NerdWallet.
What goes into determining your net worth?
Your assets compared to your liabilities determine your net worth. But what specifically falls into either category?
Assets include:
- Money in your checking and savings accounts
- Retirement savings
- The market value of any real estate you own
- The market value of automobiles owned
- Investments, such as stocks and bonds
- Any valuable property you own, like jewelry or artwork
- The cash value of your insurance policy
- The value of a business you own or have an ownership stake in
Meanwhile, liabilities may include:
- Money owed on a mortgage
- Home equity loans or home equity lines of credit (HELOC)
- Credit card debt
- Student loans
- Personal loans
- Auto loans
- Any other money owed
One thing you may be surprised to find is not included in your net worth is your income. That is because "a person can bring home a big paycheck but have a low net worth if they spend most of their money," while at the same time, "even people with modest incomes can accumulate significant wealth and a high net worth if they buy appreciating assets and are prudent savers," said NerdWallet.
How do you calculate your net worth?
While there is a lot to take into account when determining your net worth, the calculation itself is pretty straightforward. The formula is: Net worth = assets - liabilities.
There is some legwork to do before you get to plugging in the numbers. You will first need to account for all of your assets and add them up, then do the same for your liabilities.
Let us say that after totaling your assets — a mortgage, a savings account balance, the market value of your car and your 401(k) balance — you find you have $400,000 in assets. After adding up your liabilities, which includes student loan debt, a mortgage, a car loan and a small credit card balance — you find that totals $150,000. From there, you would subtract your liabilities ($150,000) from your assets ($400,000), giving you a net worth of $250,000.