We're intrigued by the net worth of celebrities, business magnates, politicians and sports heroes. But knowing our own net worth can be useful for us mere mortals, too.
However, many of us don't want to know our full financial picture, or net worth is just not on our radar. But it's never a bad thing to calculate your net worth. Here is some information on how to do just that.
What is net worth?
Your net worth is exactly how much you're worth once you subtract all your debts. So, as you can imagine, learning your net worth can be pretty humbling if you have a lot of debts and not many assets.
And how should you define assets?
"Assets are anything that can be sold for cash," says Jonathan Bird, a certified financial planner who runs Farnam Financial in Phoenix. "To understand what you have in assets, look at the value of what you own. Items such as cash, stocks, bonds, cryptocurrency, your primary home or other real estate."
As for defining your debts, Bird says, that would cover "anything that obligates you to pay cash out. To understand what you have in debts, look at value of items such as student loans, credit card debt, car loans, mortgage loans or home equity lines of credit."
Bird says that it's well worth figuring out your net worth. "Knowing your net worth is critical to understanding your overall financial health and ensuring you're on track to meet your financial goals," he says.
Jeff Busch, a partner at Lift Financial in South Jordan, Utah, agrees that everybody should know their net worth.
"Calculating your net worth is an extremely important part of retirement planning. I think most people are too casual when planning and making goals for retirement," he says.
Busch says that he recently met with a man in his late 50s who is hoping to retire in the next couple years.
"After speaking with him about his goals, I discovered that he had no idea what his net worth was or even if he still had a retirement plan," Busch says. "He said that he had contributed some money to a 401(k) years ago and worked for a company that made contributions to a plan."
Then the man started working with another employer and eventually lost track of his accounts and had no idea how much, or if anything, was available for his retirement, according to Busch.
"At this point, he was scared to even look because he is not sure he wants to know the results," Busch says.
So, don't be that guy.
How to calculate net worth
The formula isn't complicated. As noted, you simply add up all of your assets. Then you add up all of your debts. Then you subtract your debts from the assets. Voila! You have your net worth.
Busch recommends including your home equity in your net worth.
"Many people leave this out of the equation and feel a little discouraged when looking at the final number," he says. "Adding in your home equity will help you see that you are much closer to the elusive million-dollar mark than you thought you were."
Well, maybe. It depends whether you have a $1 million or more home or a $100,000 home. Still, your home equity is an important part of your net worth.
Busch, though, cautions that if you're going to live in your home for much of your retirement, it's worth calculating two net worth figures: one that tracks your entire net worth, and one that tracks only your retirement assets. You obviously don't want to give yourself a false sense of security by including your home equity in your net worth if you're saving for retirement and won't be selling your home.
What is future net worth?
That's a question everyone should ask themselves. What is your future net worth likely to be – or what do you want it to be? And more importantly, how do you get there?
Getting there is maddeningly hard but in theory should be a piece of cake. We all know what to do to expand our net worth. But similar to exercising or eating right, is not always easy – and there's no question that some people have advantages over others that make it easier for them to build a greater net worth.
Here are some ideas for building your net worth:
Spend less and make more. That's what Andrew Wang, managing partner at Runnymede Capital Management in Mendham, New Jersey, suggests. "The best way to build net worth is to spend less and make more," he says. And, of course, you're thinking: "Gee, why didn't I think of that?" But, as noted, that's what we all need to do if we're going to increase our net worth.
Keep an eye on your spending. "While many financial advisors and coaches are quick to suggest budgeting, I find the easier path is to simply start tracking your spending," Wang says. "Most people know how much money they make, but too few know where they're spending money every month."
He says that he has seen it time and time again: When people start tracking exactly how they're spending their money, they start making changes and saving more.
Ask for a raise. Granted, until the economy improves and the pandemic subsides, this may feel like a tough reach, but Wang suggests doing so. If you haven't had a raise in a while and you're excelling at work, it may be time to ask.
Pay down debt. If you reduce debt, whether it's student debt, credit card debt or a car loan, you'll raise your net worth. "Sometimes a side hustle can generate extra income to help pay down debt," Wang says.
Talk to your family about your money goals. This is another suggestion from Wang. "Families that I've seen make the biggest turnarounds have on thing in common: great communication," he says. "They openly talk about money and set goals."
Invest. If you are saving money, you can invest, Bird says. "If you have a sufficiently long time horizon, consider investing in an S&P 500 index (fund) with minimal fees," he says.
Of course, an easy and smart way to invest is through a tax-advantaged account such as an 401(k) or an IRA.
The Bottom Line
The important thing is that you track your net worth. If you do that at least once a year, you'll always have an idea of your financial picture. Even if you come away concluding that "not worth" describes your finances more than "net worth," it's still useful to know that you're in bad shape rather than deluding yourself that you might be in decent or good shape.
You might also want to keep Benjamin Franklin's quote in mind, which suggests that money isn't everything: "Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones."
|For more news you can use to help guide your financial life, visit our Insights page.|