We hear a lot about net worth, but what exactly does it mean? Many people will talk about it as an aspect of financial health, but it is just one part of your financial plan. You’ll need to think about your financial plan and your goals in their entirety when considering its impact.
Let’s take a look at how to calculate your net worth and the role it may play in your overall financial strategy.
What Does It Mean?
Net worth refers to the sum of all your assets minus liabilities, — or what you own minus what you owe. For example, if your house is worth $1,000,000 and you have a $500,000 mortgage, you own $500,000 in equity.
How do you Calculate Net Worth?
To calculate, first, take an inventory of everything you own. It generally includes cash, investments, property, vehicles, and anything else you own. To get an accurate estimate for depreciating assets (such as cars), you may need to research how much they are currently worth. Remember you can include assets you are paying off (such as a home) because you will subtract what you owe.
Here are some things you should include when calculating (although this list isn’t exhaustive):
- Checking accounts
- Savings accounts
- Retirement accounts (IRA, 401(K), pension plans, etc.)
Once you have an inventory of everything you own, subtract what you owe. Here are some examples of liabilities:
- Auto loans
- Credit card debt
- Consumer loans
- Student loans
- Unpaid taxes
After subtracting your liabilities from your assets, you will have your net worth.
Net Worth and Your Financial Health
Net worth is only one part of your overall financial picture. There are many caveats and considerations to take into account.
For example, it doesn’t include your annual income, so someone with a high annual income but higher expenses could have a lower net worth than someone with a lower annual income.
Those focused on growing their net worth may consider upping their savings, investing wisely for the long term, and lowering their debt and liabilities. When working with a financial advisor, they may consider your net worth, but many will focus on your lifestyle and how it helps or harms you on your journey to reach your goals.
Monitor net worth over time to measure how your financial situation is improving. This helps build momentum and confidence that you are on the right track.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.