Terry Herr, CFP®, CLU
We hear a lot about net worth, but what exactly does net worth mean and why does it matter? Below, we've outlined what net worth is, how to calculate it and the role it plays in your investment strategy and finances.
What Does “Net Worth” Mean?
Net worth refers to all of your assets minus liabilities, or what you own minus what you owe. For example, if your house is worth $1,000,000 and you have a $500,000 mortgage, you own $500,000 in equity. Tracking your Net worth over time is a way to your track your financial progress.
How do you Calculate Net Worth?
To calculate your net worth, first, take an inventory of everything you own. Net worth generally includes cash, investments, property, vehicles and anything else you own. To get an accurate estimate for depreciating assets (such as cars), you may need to research how much they are currently worth. Remember, your net worth can include assets you are paying off (such as a home) because you will subtract what you owe.
Here are some things you should include when calculating your net worth (although this list isn’t exhaustive):
- Checking accounts
- Savings accounts
- CDs (certificates of deposit)
- Other cash
- Mutual Funds
- Treasury bills
- Bullion (silver, gold, etc.)
- Other investments
- Real estate (market value)
- Investment properties
- Jewelry, art and collectibles
- Other property
- Retirement accounts (IRA, 401(K), pension plans, etc.)
- Social security
- Other retirement assets
Once you have an inventory of everything you own, subtract what you owe. Here are some examples of liabilities:
- Auto loans
- Credit card debt
- Consumer loans
- Student loans
- Unpaid taxes
After subtracting your liabilities from your assets, you will have your net worth.
Net Worth and Your Financial Health
A lot of people talk about net worth as a part of your financial health and while it’s only one part of your overall financial picture, I would argue it is the most important part. Like our health, net worth will ebb and flow over time but over time, a rising net worth is indicative of improving financial health.
Some caveats, net worth doesn’t include your annual income, it is possible someone with a high annual income (but with higher expenses) could have a lower net worth than someone with a lower annual income. In addition, net worth may have implications on your taxes. Your tax bracket is determined by your annual income, but those brackets currently don’t include net worth.1 If you are a high-income earner, have a high debt-to-income ratio, and are in one of the highest marginal rate tax brackets, you may accumulate net worth at a slower pace than someone who makes less money annually, but has less debt, more appreciating assets and is in a lower tax bracket.
Net worth isn't the only factor of a financially healthy life, but it is an important measurement to determine whether or not you are progressing towards your goals. If you'd like to learn more about living a financially healthy and prosperous life, we encourage you to CONTACT US to see how we can help.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.