Net worth is often an overlooked indicator of financial health. While factors like credit score and retirement savings are important, understanding your net worth can provide valuable insight into your financial situation.
Your net worth is a reflection of your wealth, calculated by subtracting your liabilities from your assets. Knowing your net worth can help you make informed decisions about your finances and track your progress towards your financial goals.
Understanding Net Worth
Essentially, your net worth is like a personal balance sheet that shows where you stand financially at a given moment. It’s the difference between what you own and what you owe.
Crystal Rau, CFP, founder of Beyond Balanced Financial Planning, emphasizes the importance of tracking your net worth to gauge your financial progress.
The ultimate goal is to increase your assets and decrease your liabilities over time. The more assets you have and the fewer debts you owe, the wealthier you are likely to be.
Calculating Your Net Worth
To determine your net worth, add up all your assets and liabilities, then subtract the total liabilities from the total assets. The resulting number is your net worth.
Assets
Your assets consist of items of value and potential income sources. Include assets such as:
- Real estate market value: Including your home, rental properties, and other owned properties.
- Vehicles market value: The current value of all your vehicles.
- Valuable items: Such as artwork, collectibles, and jewelry.
- Bank account balances: Savings, checking, and certificates of deposit.
- Investment accounts: Balances in brokerage, 401(k), and IRA accounts.
Research the market value of assets like collectibles and vehicles to ensure accuracy.
Liabilities
Liabilities represent your debts. Include obligations such as:
- Mortgages: Balances on property loans.
- Vehicle loans: Money owed on vehicles.
- Credit card debt: Total credit card balances.
- Personal loans: From lenders or financial institutions.
- Student loans: Private and federal student loan balances.
- Medical debt: Unpaid medical bills.
- Back taxes and liens: Any tax debts or property liens.
If your liabilities exceed your assets, you have a negative net worth. Focus on reducing debt and increasing savings to improve your financial position.
Using a net worth calculator can help you accurately assess your financial standing.
What Constitutes a Strong Net Worth
According to the Federal Reserve’s Survey of Consumer Finances, the median net worth for American families is $192,900. Your net worth may fluctuate over time based on factors like debt, property value, and retirement savings.
How to Enhance Your Net Worth
A growing net worth indicates sound financial decisions. Actions such as saving, investing, and debt reduction can boost your net worth, says Crystal Rau.
Utilizing Your Net Worth
Regularly calculating your net worth can help you track your financial progress and stay on course towards your goals. Comparing assets to liabilities can guide adjustments to improve your financial health.
By using your net worth as a benchmark, you can reinforce positive financial habits and make informed decisions to enhance your financial well-being.
This article has been updated with contributions from Bankrate’s Brian Baker.