Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
You might associate the idea of net worth with only the very wealthiest members of society. After all, major celebrities, industry moguls and even presidential candidates are often categorized by their sky-high net worths. But calculating your net worth is an essential financial tool for everyone, not just for those with millions of dollars.
Net worth is the total value of your assets minus the sum of your liabilities. In short, your net worth is what you own, minus what you owe. Calculating your net worth can help you get a better grip on your future financial goals by giving you a complete picture of your finances. Once you know your net worth, you can create a specific plan to improve your financial situation with the goal of increasing your net worth over time.
How to determine your net worth
To determine your net worth, you need to understand the monetary value of your assets, which include cash and investments, the value of the equity you own in your home and other real estate, how much you’ve paid on a car loan (versus how much you still owe) and the value of other things you own. Liabilities are what you owe, like the amount outstanding in car loans, the unpaid balance on your mortgage, credit card debt and student loan debt.
So before you break out the calculator, the first step to determine your net worth is to list the value of your assets and compile your total liabilities. Find your car loan documents, get out your mortgage paperwork and pull up your bank statements and investment portfolios. Print out those credit card balances. There are plenty of worksheets available online to help you through this process.
First, start with your assets
It may help to add up all the big stuff first. This includes the value of your home, any other real estate properties’ value, the value of your car and other vehicles and the like. If you have any life insurance policies, add their values in here, as well. If you own a business, your business’ value would go here, too.
Then tack on the money you have in more liquid accounts, including checking accounts, savings, certificates of deposit (CDs), brokerage and retirement savings. You can also include any valuable belongings, from your home’s electronics to your gold heirloom jewelry.
If you’re not sure what your life insurance policy or investment portfolio is worth, for example, it always helps to ask. Contact your insurer or an account manager to help you. Generally, since you’re calculating today’s net worth, use an account’s current balance or whatever amount of cash would be available to you today, rather than what would be paid out or what you could withdraw in the future.
Further, try to be more conservative when determining your amounts. You don’t want to overestimate the value of your assets when it comes time to pay off your debts. Add up everything above to find the total value of your assets.
Next, it’s time to add up your debts
Perhaps less fun to look at, but start again with the bigger debts. How much do you still owe on your mortgage? What about your car loans? After that, add on any other outstanding loans you might have, including personal loans, student loans and credit card debt. Now, add up all those amounts.
Calculate your net worth
Finally, subtract your debts from your assets. The resulting number will be your net worth. For example, let’s say you own a home valued at $250,000 and a car valued at $20,000. You have about $45,000 stashed between checking and savings accounts. At that point, your assets total $315,000.
However, you still owe $100,000 on your mortgage and $5,000 in car payments. You also have student loans that amount to $15,000. Your liabilities total $120,000. In the end, your net worth amounts to $195,000.
What if I have a negative net worth?
If you have a negative net worth, that means your debts outweigh your assets. This could be the case if you’re a student heading for graduation who owes thousands in student loans, but doesn’t have much by way of income yet. Over the next few years, as you enter the workforce, your income is likely to rise and you should start to pay down that debt, which should mean that your net worth will increase.
You may also have a negative net worth if you have overborrowed and you’re not paying down your debts. So for example, if you’ve racked up $50,000 in credit card debt, along with your $15,000 in student loans and make $45,000 per year, you’ll end up with a -$20,000 net worth. If that’s the case, you’ll have to reconsider your spending habits and find places to adjust.
How does your net worth stack up?
Of course, everyone’s net worth will depend significantly on their own financial situation. It’s hard to compare your net worth with your neighbor’s even if you paid the same for your home and cars, since you don’t know what other kind of debt he or she might be carrying.
But if you’re curious as to how your net worth stacks up compared to other folks’, let’s take a look using data from the Federal Reserve’s latest Survey of Consumer Finances (SCF) for 2016.
|U.S. median net worth by head of household’s age|
|35 and younger||$11,100|
|35 - 44||$59,800|
|45 - 54||$124,200|
|55 - 64||$187,300|
|65 - 74||$224,100|
|75 and older||$264,800|
|U.S. median net worth by head of household’s education|
|No high school diploma||$22,800|
|High school diploma||$67,100|
|U.S. median net worth by race or ethnicity of respondent|
|Black or African-American non-Hispanic||$17,600|
|Hispanic or Latino||$20,700|
|Other or multiple race||$64,800|
|U.S. median net worth by housing status|
|Renter or other||$5,200|
Why does net worth matter?
It’s not often you take time to look at the whole of your financial picture. Typically we just check our credit card balances, set up automatic repayments and continue about our day.
Determining your net worth allows you to slow down and get a more holistic view of your financial health. Essentially, it shows you what you would have left if you used all your current assets to pay off all your current debts. Check out our tips on money management now that you understand your net worth.
You should determine your net worth frequently, at least once a year, using it as a financial health checkpoint. The goal is to increase your net worth as time goes on by paying down debts and/or increasing your assets.