Net Worth 101

How to Compute it and Compare Yours to Your Peers

Net Worth 101
June 22, 2015

What is your financial net worth? Do you know what it means and how to calculate it? Figuring out your net worth is a valuable exercise to do periodically because it can provide insight into your financial health and whether or not you need to change your financial habits.

Put simply, your net worth is the dollar value of all the assets that you own, subtracted by the dollar value of all of your debts. Net worth only represents a snapshot in time of your financial status; by itself, it does not necessarily say anything about your financial health.

A negative net worth is not necessarily a bad thing – for example, you may have just bought a house and acquired a large mortgage, but your net worth gives no idea of whether you have a sufficient regular income to make payments on that debt.

Several net worth calculators are available online that can help you determine your net worth, but in any case, you will need to compile information first.

  • Assets – For the average person, assets to be included in net worth are homes, cars, the balances in your checking and savings accounts, and the current value of all investments including stocks, bonds, mutual funds, gold, real estate, retirement accounts, and the cash value of your life insurance. When calculating your total assets, use the current market value of your home and car, not the price at which purchased them.

    You may want to include personal assets that are of considerable value, such as jewelry and valuable antiques or collections – but if they have not been appraised, be careful how you determine their current value. People tend to overestimate the true market value of such assets because of their increased personal or sentimental value.

  • Liabilities – Every debt that you have goes into this category. This includes all credit card balances, mortgages and outstanding installment payments, and all varieties of loans (student loans, car loans, personal bank loans, payday loans, and the $100 you owe to your cousin or bookie).

For business owners and people with more complex financial lives, there are other assets and liabilities to consider, but the principle is still the same – dollar value of assets minus dollar value of liabilities.

Think of net worth as if all of your creditors demanded immediate payment, forcing you to sell some or all of your assets. The money you would have left over (if any) is your net worth. Negative net worth reflects how much more debt you have than what you can pay at the moment.

Now that you know your net worth, what do you do with the information? You can compare it to peers with information from the Census Bureau, or you can try sites such as https://infogr.am/household-net-worth-by-age that contains an infographic on average net worth sorted by age. However, aside from making you feel better or worse about yourself, this does not have much value.

What does have value is comparing how your net worth changes over time, and how this relates to your income and known future expenses (such as college tuition for your kids). Some online calculators will let you roughly project your net worth into the future based on an assumed asset and liability growth rate, but you are better served by thinking about specific debts and income sources.

Is your debt mostly focused in credit cards and non-appreciating sources rather than in a mortgage that secures an appreciating asset? Is your net worth decreasing because your stock investments are doing poorly? Going through the exercise of calculating your net worth helps to give you greater financial insight into your trends and allows you to adjust your financial habits to prevent future problems.

For that reason alone, it is worth calculating your net worth every so often, perhaps quarterly or annually. You can also sneak a peek at how your net worth stacks up with your peers – if you dare.

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