What’s the first thing that comes to mind when you hear ‘net worth’?
We know most people probably first think of celebrities or really wealthy people.
Perhaps you’ve Googled other people’s net worth. But, have you ever been curious about your own?
You definitely should be. When you track it over time, you are forced to face where you are financially.
This can give you the motivation to continue in the right direction, or give you the wake-up call you desperately need to get on track.
Either way, everyone has a net worth and should be aware of it.
In this post, we will explain what net worth is, how to calculate your own, and ways to increase it with some very simple steps.
Sound good? Let’s dive in!
What is Net Worth?
Net worth is your assets minus liabilities. That’s it.
You can think of your assets as what you own, and your liabilities are what you owe
So simply put, it is what you own minus what you owe.
Contrary to popular belief, it is not what your salary is or what kind of car you drive.
And, it is definitely not tied to if you wear designer clothes or expensive jewelry.
We think sometimes we might look at someone who drives or wears fancy things and think, “Oh wow, they must be wealthy or have a high net worth!”
This couldn’t be any more false!
If you take nothing else away from this post, please understand this.
It is not derived from shiny things. And having a high net worth does not just look one certain way.
How is Net Worth Calculated?
It’s honestly pretty simple.
You need to add up all of your assets and add up all of your liabilities. Then, subtract your total liabilities from your total assets.
You can do this yourself on a piece of paper. Just draw a line down the middle.
One side for assets and the other side for liabilities.
Some things you could include on your asset side are the current market values of:
- Your home
- Investments (stocks, bonds)
- Retirement accounts
- Jewelry or precious metals
- Cash value of certain life insurance policies
Basically, anything valuable that you own that can be converted to cash is going to be your assets.
Make sure to be conservative with assets you’re estimating, like your home and vehicle values. It might look better on paper but doesn’t accurately reflect your net worth.
On the liabilities side, some things you might include are:
- Auto loans
- Student loans
- Credit card debt
Your liabilities are going to be any financial obligation you owe to someone else.
Now there are some things you should not include in your net worth.
Those are things like rent or lease payments, and most insurance. Anything that is purely an expense should not be included.
Once you have the totals of both your assets and liabilities, you know your net worth.
For some, you may have a negative net worth which is completely possible.
But don’t worry… it’s ok, that doesn’t make you a bad person or bad with money.
It’s good to be aware of this and to start moving it towards a positive direction.
Net Worth Example
Starting with assets.
- Let’s say, you own your home and it’s worth $250,000.
- You have a car valued at $9,000.
- You have some retirement savings of $16,000.
- Lastly, all balances in your accounts add up to $5,000.
This gives you a total asset value of $280,000.
Now, let’s move to liabilities.
- The house mortgage is $175,000.
- The car note is $6,000.
- Student loan has an outstanding balance of $12,000.
- And you have some credit card balances totaling $3,000.
Your total liabilities here would be $196,000
In this case, total net worth would be $84,000 ($280,000 minus $196,000)! Make sense?
Tips to Increase Your Net Worth
So let’s say you did calculate your net worth and it is negative, or just not as high as you’d like.
There are steps you can take right now to increase your bottom line.
1. Increasing your assets
You can do this by opening a retirement account and maxing out your contributions.
Having a retirement account does 2 things to increase your net worth.
- They defer your taxable income. So less of your cash is going to taxes. And having more cash increases it.
- And because less cash is going to taxes and is going to a retirement account or asset, you’re also increasing your overall asset value and net worth.
And speaking of retirement, check out this post next to learn more about the IRA tax break.
2. Having a side business or doing some freelance work, also known as a side hustle
Owning a business is considered an asset for net worth purposes.
So if you do own a business, be sure to include its value on the asset side of your net worth.
And if you don’t have a business, consider starting one on the side to increase your cash flow.
3. Reducing your liabilities
This is probably the simplest way you can do to increase it.
Take inventory of all of your outstanding debt and make some extra payments on them.
It’s wise to focus on the debts with the highest interest rates and pay off the lower interest rates debts along the way.
Also, consider consolidating or refinancing your debts at lower interest rates. This can help you pay off your debt faster.
4. Cutting your expenses
We know that this is much easier said than done, but may be a necessary step to boost net worth.
Analyze your monthly expenses and see if there are any that you can cut back on.
A trick you can do is when considering buying something that may be a splurge and not really necessary is asking yourself, “Can I buy this item 5 times right now?”
If the answer is no. You probably can’t afford it, and should not be buying it.
And if the answer is yes, then great! Kudos to you. But, you probably still shouldn’t buy it because it is not a need.
The key to remember here is by not spending a dollar, you are accumulating a dollar more in net worth.
5. Tracking it at least once a month
There’s no way to know if it is increasing or decreasing if you’re not reviewing it regularly.
There are actually apps you can use that will automatically track your net worth for you.
But the process does not have to be complicated. You can literally do it on a piece of paper and compare it to the last time you calculated your net worth.
If things are going in a positive direction, then great! Keep doing what you’re doing.
If it is going in a negative direction, at least you’re aware and can take corrective action.
Average Net Worth by Age Group
We found this chart on the Federal Reserve website and it is interesting, to say the least. These numbers are thousands by the way.
As you can see, all age groups under the age of 54 have lower average net worths now than they did just 30 years ago in 1989.
Why do you think this is the case?
We believe this has largely to do with inflation.
Not only has the cost of living today dramatically increased, but wages have not kept up with the rate of inflation.
So things cost more, but you’re not getting paid more.
Student debt also has a lot to do with it.
The average student loan debt in 1990 was just $6,700. While the average student loan debt in 2020 was $37,000.
That is a huge difference. And as we all know, student debt negatively affects net worth.
Whatever the reason is, we want you to take the necessary steps to increase and build your net worth, from wherever you are today.