What’s Your Net Worth? (and Why it’s a Big Part of Your Financial Story)

Anytime you go to a new doctor, you must fill out basic information about yourself — height, weight, medication, health history, etc. The doctor uses those details to get an overall picture of your health. Your answers may help shape and guide their recommendations for different treatments, routines, or medications. The same is true for money. One of the first fields in your "financial life" form would be your net worth. What does net worth mean, and how does it impact your life today and in the future?

What’s Your Net Worth?

Your net worth provides a snapshot of your financial life. In simple terms, net worth is the value of your assets minus your liabilities. Your assets are everything you own, and your liabilities are everything you owe. A common mistake people make is thinking that their salary is part of their net worth. But it’s not included in that calculation! Why not? Your income denotes what you earn, while your net worth analyzes your level of wealth. While your income may indicate your chances of building wealth, it’s not an accurate indicator of what you own. So, someone with a high salary can have a low net worth if they spend more than they save or are burdened with debt. Conversely, someone with a modest salary can have a high net worth if they save and invest appropriately and manage their debt.

How To Calculate Your Net Worth

Calculating your net worth is a simple three-step formula. 

• Step 1: Add up all your assets (investment accounts, retirement accounts, bank accounts, savings accounts, real estate, equity, car, cash, etc.).

• Step 2: Add up all your liabilities (credit card debt, student loans, mortgage, auto loan, personal loan, etc.)

• Step 3: Subtract your liabilities from your assets, and voila!

If you want to add your numbers to the mix, check out a net worth calculator. 

How To Factor in Your Equity in a Significant Purchase

Considering how real estate assets, like your home, impact your net worth can be complex. How do you calculate significant assets like a house where you’ve built equity but still owe money via a loan? It isn’t as challenging as it may seem. Let’s break it down. If your home is worth $500,000 and your loan balance is $200,000, you can add $300,000 to your net worth. Essentially, you are maintaining a $500,000 asset on one side of your balance sheet and a $200,000 liability on the other side. By netting them out, you have the $300,000 equity.

Set Net Worth Financial Goals

Once you’ve calculated your net worth, what does it mean for your financial health? Ultimately, your net worth is a relative number to you and your financial goals. You can consider it a financial gut check instead of a hard and fast rule. By understanding your net worth, you can gauge your financial position. 

• Are you investing enough to reach your short and long-term goals?

• Do you carry too much debt? If so, how can you create a more diligent repayment plan?

• Are you overspending consistently? This can easily happen as you earn more money. Sticking with a values-based cash flow plan can help you better align your spending with what’s most important to you. Remember, money is a tool to help you reach your goals, not impress your neighbors. 

It’s important to ask yourself questions like these regularly to improve your financial life. Even though net worth is relative and personal, many investors want to know “how they are doing” compared to their peers or similar demographics. Let’s see how the rest of the country stacks up by examining the average net worth based on age. Below are the most recent data from the Federal Reserve: As you can see, the older age groups tend to have higher net worths, which makes sense! Pre-retirees and retirees have more time to accumulate wealth and eliminate debt. There is a notable gap between the first three age groups, indicating room for growth and improvement. Besides seeing where you fit among others your age, there are several other approximations and rules of thumb for establishing your net worth, including:

• In your 40s, aim to have 3x your salary in net worth

• In your 50s, aim to have 5x your salary in net worth

• Before retirement, aim to have 10x your salary in net worth

Investopedia also discusses an interesting consideration from “The Millionaire Next Door” for calculating net worth that’s a bit more in-depth. In this philosophy, your ideal net worth number is your age times your pre-tax income divided by 10. So, say you are 47, and your pre-tax income is $100,000. In this case, your net worth should be $470,000.Remember, these formulas are merely guidelines and reference points. Create your net worth goals about your specific financial targets and prioritize progress over comparison to keep trending in the right direction. 

Knowing Your Net Worth Reveals Planning Opportunities

Knowing where you're at makes getting where you want to go easier, and all of that information helps you chart the most efficient route. Depending on your age and other financial circumstances, your net worth can reveal where you need to concentrate financial efforts, like prioritizing retirement savings, paying off debt, curbing excess spending, etc. Keep in mind that this “data point” is only one part of your financial picture—there is so much more that makes up your overall financial life. We’d love to be a part of your journey in growing your net worth and forging ahead towards (and during) retirement. Reach out today.