I never really understood the meaning of net worth until I was almost thirty. I had heard the term but it sounded like something only rich people or businesses needed to be concerned about. WRONG! Net worth is something that is applicable to anybody and everybody.
I first got interested about net worth when I sat down with a financial advisor and he started doing all this math and showing me on paper what I was worth. It was eye-opening because I had never considered why this would matter to me. It was also surprising because my net worth was actually on the positive side! This got me looking to the future state of my finances and realized that I could really get on a plan to retire very comfortably if I paid more attention to what I was doing today.
Net worth is basically what your personal worth is in monetary terms, it’s what you own (assets) minus what you owe (liabilities). And figuring out your net worth is not this complicated overwhelming math genius type of calculation. It’s actually really simple.
Assets are anything of monetary value that you own. This includes your home, cars, cash, savings, retirement accounts, CD’s, bonds, even your personal property can be included if you want.
Liabilities are any outstanding debts or obligations you owe on such as mortgage, car loans, student loans, credit card debt, medical bills, back taxes, etc.
Net worth has nothing to do with how much money you make. A person who makes a million dollars a year could have debts of 1.5 million dollars, meaning they have a negative net worth of $500,000.
For example, if your assets are the following:
House value: $100,000
Car value: $9,000
401K account: $15,000
Savings/checking accounts: $4,000
Then you have total assets worth: $128,000
And if your liabilities are the following:
Mortgage balance: $90,000
Car loan: $3,000
Student loans: $18,000
Credit cards: $2,000
Then your liability total is $113,000
Subtract your liabilities ($113,000) from your assets ($128,000) and you have a positive net worth of $15,000.
If you’ve never considered figuring out what your net worth is then now is a great time to do so. All it takes is a piece of paper to write down your assets and liabilities and do the math. It gives you a good snapshot of your financial state at this moment. You may have to do some initial digging through your statements to see how much you owe but it’s important to come to terms with if you have no idea. You may be surprised at what yours is, it may be negative or it may be positive. Neither one is bad or wrong, just by knowing what yours is puts you miles ahead of most people and it enables you to make some changes if necessary and hopefully only go up!
Anytime you borrow money your net worth will go down. Anytime you pay off debt your net worth will go up. Anytime you contribute to a retirement account your net worth will go up (assuming the market is not crashing). Anytime you put more money in your savings account your net worth will go up. So it’s really all uphill from wherever you are as long as you don’t incur any more debt!
Once you’ve done your initial net worth check it’s easy to continue tracking it. It’s good to do a financial checkup every once in a while like every quarter or six months to see where you stand. I personally use a paper spreadsheet to track ours each month because I’m a financial nerd and I like doing stuff like that. I also use an app called Personal Capital that does it for free and updates it automatically anytime I log in. It’s a really simple easy to use app, it links all of your accounts in one place and has pretty graphs and lets you know exactly where you stand anytime from anywhere…and again it’s completely free! (You can use this link to set up your own Personal Capital account on your phone and you will get a free $20 credit to Amazon for you and me if you’d like, hey who couldn’t use a free $20 bucks to Amazon right!)
Knowing what your net worth is can be very useful in planning for your financial future and retirement. You can set yourself up today for a prosperous future by taking a few moments to get an understanding of where you are at now. Even if you’re net worth is really negative there’s still time to work on getting it to zero, you just have to start somewhere. Zero is a great place to be because it simply means you are now at the stage to begin building a positive net worth. Pay off any debt, save, invest, and your net worth is sure to skyrocket!
