How to Actually Think About Net Worth
Net worth can be an important part of your finances. One way to think about your net worth is that it’s what happens to your budget over the long-term. Your budget can give a snapshot of your finances over a weekly or a monthly time period. Your net worth is a picture of your finances over a period of years or decades.
What is net worth?
Your net worth is the sum total of your assets minus your total liabilities. When you subtract your liabilities from your assets, the difference is your net worth. While most people have a positive financial net worth, it is possible for your net worth to be negative. This can happen if your total liabilities are more than your total assets.
It’s important to keep in mind that your net worth is just one way to calculate your personal wealth. You can also consider looking at our retirement calculator and investment calculator to more fully understand your overall financial picture. Another important factor in looking at your net worth is that you may have a high net worth but still not be in great financial shape. This can happen if much of your net worth is tied up in assets that are not liquid, like home equity. If you’re in this situation, you might have a high net worth but still struggle to meet your monthly bills.
How do I calculate my net worth?
To calculate your net worth, you’ll want to total all of your assets and all of your liabilities. Here are some examples of common assets to consider:
- The approximate value of any real estate that you own, such as your primary residence
- Stocks or other investments
- Retirement accounts
- Cash in checking accounts or savings accounts
- Personal property such as cars or jewelry
Some common liabilities that people have:
- The mortgage balance for any property that you own
- Car loans
- Student loans
- Medical debt
- Credit card debt
Once you have a list of all of your assets and liabilities, you can subtract your total liabilities from your total assets to find your net worth. Mint’s Net Worth calculator can help you calculate your overall net worth.
Why knowing your net worth is important (and why it’s not)
Tracking your net worth can be a useful tool in your financial arsenal. Studies have shown that goals that are tracked and reported are more likely to be completed. So from that perspective, knowing your net worth can be important because it can help you to make sure that it moves in the right direction. When you pay attention to your net worth, you are much more likely to notice if there is anything that is preventing you from increasing your net worth.
But it’s also good to remember that your net worth is not the same as your self-worth. So while having a positive (and growing) net worth is a good thing, all things considered, don’t feel like you’re a failure if your net worth is lower than other people’s. Rather than comparing your net worth to that of your friends, family, or peers, compare it to yourself over time. When you track your net worth over time (such as each month), you can look back and see how it has (hopefully) improved over the past months or years.
Growing your assets and shrinking your liabilities
Since your net worth is the difference between your total assets and your total liabilities, you have two different ways to improve your net worth. The first way is to grow your assets. Adding more money to your cash or investment accounts will grow your net worth. If your home appreciates in value, that will also add to your net worth.
The other way to grow your net worth is by shrinking your liabilities. One great way to do this is by paying down your debt. Whether you use the debt snowball, the debt avalanche, or another tactic to pay down your debt, every dollar you pay off is another dollar added to your net worth. If you pay off your mortgage that also removes a liability from your net worth calculation.
The Bottom Line
Your net worth is calculated as the sum of the value of all of your assets minus the sum of all of your liabilities. Knowing and tracking your net worth can be an important way to keep yourself financially healthy. You can improve your net worth by either increasing the value of your assets or by paying down your debts. Both strategies can work to increase your overall net worth.
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