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A good salary, a nice home and money in the bank may make you feel like you’re doing just fine. But to truly understand your overall financial situation, it’s important to know your net worth.
That’s because your personal net worth considers what you owe (like the mortgage on your house) — along with what you own (like your 401(k) plan).
The goal is to work toward a positive net worth and grow it over time. In 2016, the median household net worth in the U.S. was $97,300, according to the Federal Reserve. Yours might be higher or lower. And a negative net worth isn’t necessarily a sign of impending financial disaster.
Let’s look at how to calculate net worth, what net worth can tell you about your financial well-being, and some ways you may be able to grow your net worth.
What is net worth?
Calculating your net worth is straightforward.
Add up all of your assets (that’s what you own, like your savings). Then add up all of your liabilities (what you owe, like credit card balances or student loan debt). Subtract the total of all your liabilities from your total assets. Your net worth is positive if you have more assets than liabilities. But if your liabilities add up to more than your assets, then your net worth is negative.
A negative net worth is a typical scenario for younger adults, says Brent Weiss, co-founder at Facet Wealth.
“Many people start out their personal financial lives with negative net worth,” he says. “That’s because we come out of college and maybe have a little in savings but maybe also $30,000 in student loans.”Learn about how credit card balances affect your finances
How do I calculate my net worth?
Calculating your net worth starts with identifying your assets and liabilities.
Assets include money (bank accounts, CDs and bonds) and things you could sell for money (stocks, personal property and real estate). When you list your assets, only include those you’d be willing to liquidate if needed. Here are some examples.
- Bank accounts, like checking and savings accounts
- Retirement savings, like 401(k)s and IRAs
- Investments, including stocks, bonds and mutual funds
- The value of real estate you own, such as home equity
- The market value of vehicles you own
- Valuable items you could sell, including artwork, furniture and jewelry
This is money you’re obligated to pay back, including revolving consumer debt and loan balances. Here are some examples of liabilities.
- Student loans
- Credit card debt
- Car loans
- Back taxes
- Medical debt
Calculating net worth
Once you’ve listed your assets and liabilities, you can calculate your net worth. Here’s a simple example of how that might break down.
- Checking account balance: $4,000
- 401(k) account balance: $30,000
- Home equity: $50,000
- Market value of a car you own: $10,000
- Appraised value of antiques you own: $4,000
Total value of assets: $4,000 + $30,000 + $50,000 + $10,000 + $4,000 = $98,000
- Mortgage balance: $150,000
- Car loan balance: $10,000
- Credit card balance: $4,000
- Personal loan balance: $1,000
- Student loan balance: $20,000
Total liabilities: $150,000 + $10,000 + $4,000 + $1,000 + $20,000 = $185,000
Now, subtract the liabilities from assets ($98,000 – $185,000) to arrive at a negative net worth of $87,000.
How can I build my net worth?
Your net worth provides a snapshot of your financial situation at a certain point in time, so it can change — ideally for the better. But when you assess your overall financial health, it’s also important to consider your income, monthly expenses and the any money you save every month.
On top of saving for retirement, it’s important to save for emergencies.
“A lot is in flux when you’re young,” Weiss says. “You want to make sure you have the liquidity to cover emergencies or really to give you the flexibility to try a new job or travel.”
Generally speaking, building net worth means reducing your liabilities and increasing your assets.
Weiss has advice on how to start: “List three or five goals, develop a plan, and then take small steps to achieve them. It happens one step at a time.”
There are a couple of steps you can take to increase your net worth. You could save up six months’ worth of expenses for an emergency savings fund or work on paying down your debt. Creating a cash reserve can increase your assets, while knocking out some of your debt, like your credit cards or student loans, can decrease your liabilities. Changes like these could push your net worth toward the positive.
Review your budget and see where you can trim expenses, which would free up funds to put toward your debt. You could also try to increase your income by taking on a side job or investing some of your money. Based on your budget and income, you can figure out how long it will take to achieve each goal.
How can I track my progress?
Once you understand more about your financial health, tracking your net worth will help you gauge your progress. Calculate your net worth regularly until you’ve met your financial goals. Then assess your net worth, income and budget again so you can create a new set of goals. For example, you might want to pay off your mortgage early or invest more money.Learn how to get out of debt in 5 simple steps
Calculating your net worth is pretty straightforward. But reducing your debt balance and growing your savings can be more complex — and it won’t happen overnight.
“Building wealth is sometimes boring, but it takes discipline and time,” Weiss says. “There’s no magical solution.”
That’s why tracking your progress by keeping an eye on your net worth can help — it shows you if you’re steadily reaching your goals.
It could be beneficial to speak with a financial adviser to formulate those goals and any potential investment strategies, and then set new goals as you move forward. Over time, you could find the sweet spot where your net worth shows that you own much more than you owe.