You likely know your household income and the balance in your checking account. But do you have a handle on your household net worth?
What is your net worth?
Net worth is simply the difference between what you own (your assets) and what you owe (your liabilities). To put it another way, it’s the money left over after subtracting all of your debts from the total value of your assets.
Calculating your net worth is essential for several reasons. It provides a clear snapshot of your financial health and long-term sustainability.
It keeps everything in perspective
Suppose you’re a doctor or business owner earning $225,000 annually. You might assume that fully funding your 401(K) plan is enough to secure your financial future while allowing you to live your best life today. But what about the RV you purchased during the pandemic and the supersized mortgage on the slopeside condo in Vermont that received a major assessment? These liabilities can chip away at your net worth and limit your financial flexibility.
It encourages smarter financial decisions
Tracking your net worth keeps you aware of your cash flow, both in and out. This high level of awareness can help you make smarter choices about when to acquire net assets and when to pull back on spending. It can also be an eye-opener, helping you recognize financial habits working against your longer-term goals.
It brings peace of mind
While a healthy paycheck can feel good in the short term, knowing your net worth offers a more complete and satisfying picture of your financial status. It helps you think beyond your income and current expenses, giving you more insight into your wealth.
How to calculate your net worth
Calculating your net worth is straightforward. Start by adding up all your assets, such as:
• Your savings and checking
• Investments (stocks, bonds, retirement accounts)
• Home equity
• Any other valuable assets (vehicles, real estate, etc.)
Then, tally up your liabilities:
• Mortgages
• Auto loans
• Credit card debt
• Student loans
Finally, subtract your total liabilities from your total assets. The result is your net worth. Ideally, you want to see this number grow over time. Remember that certain assets, like your home and investment portfolio, will fluctuate yearly, so updating your net worth regularly is wise.
Steps to grow your net worth
If you want to improve your financial situation, creating a plan is key. Here are a few strategies to get started:
• Reduce unnecessary spending; cut back on discretionary items when possible.
• Increase your income; ask for a raise or find ways to earn additional income.
• Pay down debt; start by targeting high-interest debts.
• Invest for the future. The earlier you invest, the more time your money has to grow.
Tracking your net worth isn’t just for the ultra-wealthy; it’s a valuable tool for anyone looking to improve their financial health and make informed decisions about their future.