Personal Finance

5 min read

November 23, 2020

How to Calculate Your Net Worth

Understanding your financial health for long-term growth

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When it comes to personal finance, many people put their focus on how much they earn or how much debt they have. While income plays an important role in your financial life, there’s actually another number that is more effective when reviewing your financial health and that is your net worth.

What is Net Worth?

Your net worth is a number that represents your total financial value, taking into account both your assets and liabilities. Assets are anything of financial value and liabilities refer to any loans or debt you owe creditors.

When taking your assets and subtracting your liabilities, you get your net worth — which offers a more accurate picture of where you’re at financially.

For example, someone can make six figures but have little to no savings and a hefty student loan balance. In this example, the net worth is likely negative even if the income is high. That’s why income shouldn’t be an indicator of financial success. It’s what you put away from what you earn that matters most.

Your net worth is a metric worth looking at because it looks at the big picture and shows how much financial value you really have. Though there is a fairly simple formula to calculate net worth, there are some variances based on preference.

For example, someone may not include the value of a car if it’s paid off and going to be in use until it dies. Some people choose not to add the value of their home if it is used to live in and not an investment property. Some common net worth questions include:

Do you include 401(k) in net worth?

When calculating your net worth, you want to include all of your assets. Your 401(k) is considered an asset and has a cash value that can add to your net worth. You can include 401(k), 403(b), or any other retirement accounts in your net worth.

Does net worth include home?

For many people, the value of their home is the largest part of their net worth. Think of the phrase “house rich, cash poor.” In your net worth calculation, you want to include your home as an asset. But if you have a mortgage, you’d also want to include it in liabilities. If this is someone’s primary residence and not intended to be an investment property, some people choose not to include their home in their net worth calculation.

What should net worth be at 30?

By age 30, a rule of thumb is to have your net worth equal one year of your annual income. So if your annual salary is $60,000, you would want your net worth to be $60,000. You can calculate your net worth by subtracting liabilities from the amount of total assets.

Why You Should Track Your Net Worth

Tracking your net worth can show you if you’re really making financial progress or not. Ideally, you want your net worth to go up. You can decide to track your net worth monthly or quarterly to see how you’re doing. If the number isn’t budging, it’s likely you need to limit your liabilities. So that means paying down debt and also limiting your expenses so you can save more.

Net worth tracking can be great because it’s fairly straightforward. You should have a budget, but some people get lost in tracking every little expense or coming up with an accurate number for each category. If a budget doesn’t seem to stick, you can track your net worth to get a big picture look at your finances.

How to Calculate Your Net Worth

You don’t have to be super great at math or go through some crazy formula to calculate your net worth. Here’s the simple formula and steps to take.

Assets - Liabilities = net worth

Step 1. Add Up Your Assets

The first part of the equation is your assets. So you want to take an inventory of everything you have that has financial value. That can include:

  • Checking account
  • Savings account
  • 401(k) or other retirement plans
  • Cash
  • Stocks
  • Mutual funds
  • Money market account
  • Certificate of deposit
  • Car value
  • Home value

If you have a company you likely want to do a separate business net worth. In calculating that, there are tangible and intangible assets. Tangible assets are physical things such as buildings and equipment. Intangible assets are things that have monetary value but aren’t physical, such as intellectual property or copyright. Intangible assets have the possibility of making money in the future.

Step 2. Review Your Liabilities

The next step is to review your liabilities and see how much you owe in total to creditors. This might include:

  • Student loans
  • Credit card debt
  • Mortgage
  • Car loan
  • Personal loan
  • Medical debt
  • Tax debt

Go through each liability and write down what you owe. When you’ve listed all of your liabilities add all of them up to get your liabilities number.

Step 3: Take Assets and Subtract Liabilities

Once you have all of your numbers, you can take the total assets amount and subtract the liabilities amount. The remaining number is your net worth.

Example:

Assets:

  • $700 - checking account
  • $10,000 - savings account
  • $23,000 - 401(k) account
  • $4,000 - car value

Liabilities:

  • $38,000 - student loan debt
  • $2,400 - credit card debt
  • $8,000 - car loan

Assets = $700 + $10,000 + $23,000 + $4,000 = $37,700

Liabilities - $38,000 + $2,400 + $8,000 = $48,400

Then you’d take assets ($37,700) and subtract liabilities ($48,400) = -$10,700

In this case, there is a negative net worth which means liabilities exceed the amount of assets. Ideally, you’d have a positive net worth. To gain a positive net worth, you’d want to pay down more debt and put more in savings and investments. You want your assets to be more than your liabilities to have a positive net worth.

Bottom line

Your net worth is important as it can show you in real terms how you’re building wealth or where you’re falling short. The net worth number doesn’t lie! Regardless of where you’re at (even if you have a negative net worth), the goal is to increase your net worth over time.

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Melanie Lockert
Melanie Lockert
Melanie Lockert is the founder of the blog and author of the book, Dear Debt. Her work has appeared on Business Insider, Time, Huffington Post and more.

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