Your net worth is a reflection of your financial sustainability. It's your bottom line. Your income plays a role over time, but your habits do too.
You might ask yourself this question. If you're thinking about a philosophical kind of question, that's a much bigger answer. Those kinds of questions are life-long questions for which we are all looking for an answer. (As your search continues for those deeper answers, just accept that you are pretty fabulous.)
Your net worth is a question of the actual monetary value of your wealth if you add up everything you own and everything you owe. There is a dollars-and-cents answer, but similar to the deeper metaphysical kind of question, calculating your net worth is a life-long quest. How much money you have when you enter the workforce obviously changes over time, as does your net worth.
Knowing your personal net worth gives you a big-picture view of your finances. It stretches beyond your budget and allows you the ability to see how your financial efforts are changing and growing your net worth over time.
What is net worth?
Simply put, your net worth is a mathematical calculation that includes the plusses and minuses of your finances. Again, your net worth isn't a measure of the positive and negative connotations of your efforts, but rather the literal + and - of every item of monetary worth. The money you owe, your liabilities, are subtracted from the money and possessions, your assets, that you've purchased.
Unlike your credit score, your net worth doesn't look back at just the last seven years. Your net worth is both a measure of the personal capital you've accumulated over time but also the wealth you have at this very moment. It's the calculation, but also what that calculation says about your financial health.
Your net worth numerically
If you're a fan of numbers, you may enjoy calculating your net worth. It's nothing more than adding up all your assets and subtracting your debts. In short, anything that has a cash value, even if the value of the item belongs to someone else, like the bank to whom you are still paying for your student loan.
Your assets can include the equity in your home and any other real estate you may own. Your retirement accounts and mutual funds also have a value, but if you watch the stock market, you know that value changes daily. Also count any money you have in any account: your checking account balance, your savings, any CDs, plus your HSA. Your total assets can include your vehicle's value, the boat you never get to take out often enough each summer, the cryptocurrency you bought last year, and the first-edition book that's been in your family for generations. Anything you can sell for a cash value makes up your liquid assets.
Your total liabilities include the total amount of your loans, including your student loan, your credit card debt, the money you still owe on your truck, and even the remainder of the balance on your BNPL purchases. Your entire home value is your asset (a big amount in the plus column), but whatever you owe the mortgage company is the amount of your liability.
Your salary is not an asset, at least not until it hits your bank account. If you know you're going to earn a $10,000 bonus at the end of the year, it's not a plus on your balance sheet until you actually have it in hand — just as Clark Griswold about his jelly-of-the-month-club subscription.
Keep in mind it is possible to have a negative net worth if you owe more than you own. Do you know what that means? It means you can change that over time. Your net worth is always changing.
Your net worth’s value
The more assets you accumulate increase your net worth. This is why your net worth changes over time. The more you pay towards your debt also reduces your liabilities. Yes, your net worth can change from day to day following each loan payment and additional contributions to your 401k, but it takes time to get to the point where your equity in your home tips the net worth scale in your favor.
Making smart personal finance decisions every month can contribute to your net worth over time. Choosing to save up for the tankless water heater rather than just putting it on your credit card keeps your net worth healthy. Much like the value of a company, your personal net worth can give lenders an idea of your ability to repay loans, a solid picture of your financial health at stages throughout your life, and a way to track your financial wellness over time.
Why is net worth important?
Your net worth is a reflection of your financial sustainability. It's your bottom line. Your income plays a role in changing your net worth over time, but your habits and lifestyle do, too. If you're an avid gambler, a stress shopper, or you wish your local divorce lawyer had a punch card loyalty program, your high income may not accurately reflect your financial picture going forward. Debts — your liabilities — can take many forms and add up quickly, especially when you owe interest on unpaid debts.
If you can have a low or even negative net worth and still be on the right track, then what's all the fuss about? Your net worth is important because it gives you a more holistic look at your financial health. The simple exercise of adding up everything you own and everything you owe can help you get a detailed picture of where your finances stand. You can see not only how your net worth is increasing over time, but how it is positioning you to reach your financial goals.
When you focus on ways to evaluate your finances, it becomes easier to identify ways to improve your net worth. You might discover it will improve your net worth long term by adding passive income opportunities, such as rental property, that add to your net worth beyond your income and allow you to improve your financial health.
Your net worth over time
Let's say you calculate your net worth at age 23 and discover you have a negative net worth. Don't panic. That's not surprising. You haven't had time enough in your career to earn enough income to offset the costs of life, such as your car payment. You likely have not been able to increase your emergency savings to give yourself a four-to-six month cushion. It's not uncommon to have more debt than you are saving. Calculating your net worth can illustrate that.
Also, the market value of your car will likely decrease over the course of five years (and that time you were rear-ended). It happens. As you track your net worth over time, you can see how can putting money towards your retirement savings is a better use of your income than paying down debt. Knocking it out and putting your money towards accounts that help you grow your wealth can change a negative net worth. Imagine how good it will feel to check your net worth and find it has flipped to the positive. That's you stepping up and controlling your financial wellness.
As you add money to your investment accounts, they grow and increase beyond your initial contribution. The total amount increases, as does your net worth. If you can see how your net worth grows year-over-year, it's easier to see if you are on course to reach your financial goals. When your house appreciates in value, your net worth also increases even without you having to take any action.
So what's a good net worth? In truth, the number that matters for your net worth isn't where it stands at any given point in time. It's how your net worth is trending over time. This is why calculating your net worth is about your life-long efforts, not just today's results. Tracking your net worth using a regular net worth statement over time can help you make smarter, more informed financial decisions and keep a pulse on the money coming in and out of your life.
The end goal? Set realistic financial wellness plans and reachable targets for your future. When you take this big-picture net worth approach — understanding and sizing up both your assets and liabilities — you can figure out ways to make your money work harder.
For example, if you have savings sitting in an account on the assets side of your balance sheet that isn't growing at a high rate, but you also have a loan or two with really high interest rates on the liabilities side of your balance sheet, it would make sense to use the money in your savings to pay off the loan now rather than losing money in interest payments over time. This is how to make your money work harder so you can reach a positive net worth.
What net worth means to you
Your net worth is mostly a metric for you to track for your own benefit. You may hear the names of high net worth individuals on news reports about the richest people in the country or the world. Why? Because they calculate their net worth regularly. So why does it matter for the rest of the world?
Lenders, renters, and other people who make financial decisions in your life may sometimes ask you about your assets, but no formal net worth calculation goes into your credit score. In fact, your credit score is completely independent of your income, account balances, investments, and other wealth indicators. Rather, it's a metric of your reliability to repay debts based on information gathered from your history, including repayment history, collection accounts, bankruptcies, tax liens, and other public records.
It's possible to have a high credit score and a low net worth. If you are paying down your debt diligently, either on time or even early, you are boosting your credit score, and yes, increasing your net worth slowly. Neither are bad reflections on your finances. Using our previous example, you may have some debt and a lot of savings. You might be able to boost your credit score by paying down the debt, and you will improve your net worth eventually, too.
Tracking your net worth might show you where you should pay attention to the interest rates on loans, watch the equity on your home increase, and see the advantage of changes in the current market value of your home. Paying down the balance on any student debt will allow you to monitor your outstanding liabilities and see how lowering them causes your net worth to increase. Compared to those big spenders, your cash flow is not as much a factor as investing wisely, saving responsibly, and eliminating debt. Your net worth should help you find a path towards financial independence.
How to track your net worth
You can easily find a net worth calculator on the internet, but in fairness, the math isn't the hardest part of tracking your net worth. The tricky part is gathering up all the pieces of your personal finances — your bank account, your car's current value, the total value of your home, how much money you owe, and even the resale value of your camper or rental property. Again, calculating your total net worth regularly will make this task easier.
Don't be daunted if your net worth drops occasionally. As consumer finances change, so might your net worth. As interest rates rise, so might your outstanding credit card balance. Perhaps your stocks or mutual funds are not performing as well this year as last year. Maybe those renovations you made to your home may have increased your home value since last year, or your rental property has a steady tenant and is earning you that extra influx of money. This is why it's important to remember your net worth is more than your results right now.
If you want insight on how to get started tracking your net worth and how your net worth changes over time, check out our average net worth by age blog to understand where you stand, and how your personal net worth trend can tell you where you stand. You can also use our net worth calculator to help get started pulling together all your assets and liabilities.
It never hurts to calculate your net worth, no matter your age. Taking the net worth approach to evaluate your finances lets you use the right assets, prioritize eliminating the correct liabilities, and create more opportunities to develop passive income. It's a more thorough, thoughtful way to evaluate the finances that can help you make the most of your money and bring value — both monetary and beyond — throughout your life.