How to Compute Your Net Worth
You may have heard someone at a party brag about their “net worth” (usually after a few drinks). At its most basic level, a person’s net worth is simply the amount of their assets (the things they own) minus their liabilities (how much they owe). The fair value of your home (if you are an owner) is an asset, and the amount of your mortgage is a liability.
If your assets and liabilities are fairly straightforward, it should be easy to calculate your net worth. Just start by adding up the value of everything you own, including the amount in your savings accounts, retirement accounts, investment accounts, and the fair market value of your possessions, and then subtract everything you owe, such as your mortgage, car loan, student debt, and credit card debt. Voila! You have a basic calculation of your net worth.
So what? Is this number useful?
Why Knowing Your Net Worth May Not Matter
Just like your weight or your annual salary, it is easy to become fixated on your net worth to the point where it becomes a crucial part of how you define yourself. You may also find that you wonder how your net worth compares to the net worth of your friends and peers.
This can lead you down a dangerous rabbit hole.
Net worth does not equal your self-worth, and the number itself is far less important than knowing how much you need to save to achieve the lifestyle you want now and in retirement. For instance, if you are living comfortably within your means and are on track for your retirement, then it doesn’t matter if your neighbor’s net worth is double yours. In fact, your neighbor may have a very expensive lifestyle and worry about meeting monthly bills while you are serene in your financial stability.
Why Knowing Your Net Worth Can Still Be Useful
Knowing your net worth can be a good benchmark that allows you to keep track of how your savings and retirement planning is coming along. Your net worth should grow over your lifetime as you are able to save more money, build value in your home, and pay down your mortgage and student debt. Your net worth should also reflect your increasing salary as you move forward in your career and the growth of your retirement savings. If your net worth is going down or has been flat over the past few years, it’s worth taking a look at your financial planning and budgeting to find out why.
If you need help getting back on track with your financial goals, then consider joining or creating your own Money Club. A Money Club is a great way to become financially literate and receive support from a close knit group of friends who are working on their own money goals.