I’m going to come right out and ask, what is your net worth?
Do you know your number and how to calculate it? If not, that’s okay. You are in the right place! I will break down the net worth calculation in just a bit.
For those of you who have taken the time to calculate your net worth in the past, how do you feel about your number? Does this number leave you feeling optimistic about your financial future or does it leave you feeling some type of way? More on that to come.
The first thing I will address is the importance of understanding and knowing your net worth. I believe its a worthy exercise because it forces the user to collect and inventory all their financial pieces, good or bad. This exercise leads to financial awareness which often lends itself to creating financial goals and budgeting.
Assets vs. Liabilities
The net worth calculation is simple:
Net Worth = Assets – Liabilities
While the calculation is elementary, its the process of identifying all the assets and liabilities that can be daunting.
An asset is something of value that you own. A very ambiguous definition but specific to net worth, an asset is typically a personal financial account. Some examples include:
- Checking & Savings Accounts
- Money Market Funds
- Employer Retirement Plan (401(k) or 403(b), etc.)
- Individual Retirement Account (IRA)
- Taxable Investment Account
- Value of your home
A liability falls on the other side of the fence and can be defined as an obligation that you owe to someone else. Looking specifically at financial liabilities some examples include:
- Outstanding Credit Card Balance
- Outstanding Medical Expenses
- Student Loans
- Car Loan
- Home Mortgage
- Home Equity Line of Credit (HELOC)
Once you’ve identified your personal assets and liabilities, the next step is to total up all the assets then total up all the liabilities. From there take your total liabilities and subtract them from your total assets.
What number do you end up with?
Positive Net Worth
If you ended up with a positive net worth, job well done! My guess is that your path to having a positive net worth was a result of hard work, sacrifice and diligence. The focus at this point should be to continue growing your assets and paying down any liabilities to increase your overall net worth.
There are a handful of benchmark studies that recommend having “x” net worth at “y” age. I’ve included one below.
While informative, I am not a huge fan of these studies. They are far too general and assume a one size fits all retirement solution. Every household is different with unique financial and retirement goals. The best way to know with certainty if you are trending in the right direction with savings is to have a conversation with a financial advisor.
Negative Net Worth
If you find yourself with a negative net worth, know that you are not alone. The first step of getting yourself into “the black” or having a positive net worth, is understanding your current financial situation. Once you have awareness of your finances, you can begin creating a debt management plan pay down your debts efficiently. Debt management is a huge topic and one I plan to address in future posts. Stay tuned!
Better Ways to Track
If you found going through this exercise time consuming, then I am happy to share with you that there are better and more efficient ways to keep track of your net worth moving forward. In this wonderful age of technology, there are so many websites and applications that can track your net worth on your behalf. Some of my personal favorites include:
I’ve noticed that over the years that banks and other financial institutions are offering account aggregation and net worth tracking services to their clients. Take a minute next time you are logged into your bank or investment provider’s website to see if this is something they offer.
Encouraging you all to take the first step towards financial awareness and calculating your net worth today, by hand or otherwise. One final note is that this is not a one-time calculation. I would encourage you to re-calculate this figure at least once a quarter to check-in and evaluate your financial progress.