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What is your net worth and why does it matter?

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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.

 

Assets Liabilities (debts)
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
Net worth $176,390

 

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.

 

Assets Liabilities
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
Assets  $48,920 Total liabilities  $89,895
Net worth  ($40,975)

 

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.

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