Net worth is pretty simple – it is what you own minus what you owe. Some people say you shouldn’t include the equity in your primary residence, your household goods or your vehicles. Others say go ahead and include them. You can decide – that’s your choice. In its most basic form, your net worth gives you an idea of where you stand financially. It is a good goal to try to continually increase your net worth.
Here are two typical examples:
Gina and Adam are a married couple in their late 30s, have a home with a mortgage, two vehicles, some savings, a retirement account, some credit card debt, a student loan and 2 car loans. Here is how they would calculate their net worth.
|Home value||$245,000||Mortgage loan balance||$156,334|
|Vehicle 1 value||$17,000||Car loan 1 balance||$15,674|
|Vehicle 2 value||$12,000||Car loan 2 balance||$8,671|
|Gina’s 401K from work||$76,776||Gina’s student loan balance||$32,095|
|Adam’s IRA account||$30,955||Credit card debt||$1,453|
|Regular savings account||$8,886|
|Total assets||$390,617||Total liabilities||$214,227|
Jorge is a 24 and single. He rents an apartment and has recently purchased a new vehicle. He has some credit card debt, student loan debt, and contributes to his 401K at his job. He also has an emergency savings account that he contributes to regularly.
|Vehicle value||$28,800||Car loan balance||$26,897|
|401k value||$10,446||Student loan balance||$60,544|
|Savings account||$9,674||Credit card debt||$2,454|
Gina and Adam have a positive net worth and Jorge’s is negative. But at their respective life-stages, that isn’t unusual. People starting off often accumulate debt before assets, especially if student loans are in the equation. As time passes, you want your net worth to rise to the positive. By the time you approach retirement age, your net worth should be enough replacing 85% of your working income for the rest of your life.
If you want to see how you compare to the national average, check out the Survey of Consumer Finances put out by the Federal Reserve Bank. It’s a bit of a read, but if you go to page 13, you will see a table for comparison.
Why it matters
Net worth is a measure of your financial health. Your income may be high or low, and your lifestyle may be simple or extravagant, but neither truly measures where you stand financially. People making six or seven figure incomes can have negative net worth due to high debt. On the other hand, someone making under $50k a year can have a positive net worth in the hundreds of thousands of dollars, due to frugal living and consistent wealth building.
Calculate your net worth, and update it every year or so. See if it is getting worse or better, and use it as a tool to help you improve your financial health and be prepared for retirement.