A person’s net worth describes their total financial value, and is calculated by subtracting their liabilities from their assets. Though we generally discuss net worth in relation to very wealthy individuals, it can be important for people who aren’t billionaires to know their net worth as well.
A person’s net worth can be an important reference point in understanding one’s financial position. Net worth can be negative, especially early on in one’s careers. But net worth can help an individual figure out how much they need to save, how much spending they need to cut back on, or how much they’ve saved for retirement.
How to Calculate Net Worth
If you’re wondering how to calculate net worth, it’s actually a simple formula:
Assets – Liabilities = Net Worth
The hard part is usually determining a person’s assets and liabilities. And a person’s assets can go beyond what they have in their checking account. In fact, a person’s assets can include a whole host of things.
Assets
Assets basically boil down to how much money you have, as well as the value of things you own. In order to know one’s net worth, estimate the value of each asset below:
• Money in savings accounts
• Money in checking accounts
• Money in investing or retirement accounts. Brokerage accounts or 401(k)s are in this bucket.
• Physical cash
• Value from insurance policies
• Value from business ownership or stakes
• Value of cars
• Valuable personal goods, like jewelry or art
• Value of real estate, including home
Calculating the value of a home can be a task in itself. It’s important to research the value of the homes around you, the size of your home, any deferred maintenance on the home, additional benefits like parking spots, backyard space, room count, etc. There are a number of home value calculators online, too.
Recommended: Understanding Property Valuations
There are other ways to think about assets:
• Liquid Assets: Items like stocks, bonds, mutual funds, or ETFs that are easy to sell quickly and whose sale will not greatly affect their price.
• Fixed Assets: These are items that would take a longer time to convert to cash. These assets are often deposited for extended periods of time in exchange for high interest accrual and thus cannot be cashed before their agreed-upon time frame is up.
• Equity Assets: Equity assets include your shares in a company, either private or public.
Intangible Assets, such as brand recognition for a company or any other intellectual property like patents, trademarks or even goodwill, are trickier to factor into your net worth due to the complexity of measuring their value.
Liabilities
Liabilities are debts. The following categories are what most often make up liabilities:
• Auto loans
• Student loans
• Personal loans
• Business loans (personally guaranteed)
• Credit card balances
• Mortgages
While liabilities are on the negative side of the net worth equation, it doesn’t necessarily have to symbolize something negative about your finances. For example, student loans or mortgage loans are typically seen as necessary loans that individuals take on as they reach milestones in life, like going to college, graduate school or buying a home.
Meanwhile, knowing one’s total liabilities can help with figuring out a plan to start paying off debt that has higher interest rates, like from credit card balances.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
Median and Average Net Worth in US
An individual or household’s net worth isn’t set in stone, and it ebbs and flows all the time. For that reason, it can be difficult to nail down median or average net worth figures for both individuals and households in the U.S. You can find some numbers if you search for them, but they’re often several years old, and may not be accurate given the time lapse.
For instance, the Federal Reserve tracks median and average net worth data in the U.S., but generally, they do so using survey data that it publishes once every few years. So, while data from a few years ago may be fine, large-scale world events–such as a pandemic, natural disaster, recession, or similar–may have led to large changes in those numbers.
This is all something to keep in mind if you seek out average net worth numbers. It’s not that they’re inaccurate, it’s simply that the data may be hard to capture and synthesize in a reasonable amount of time.
Remember, too, that it’s important to keep abreast of your net worth because this number may fluctuate depending on factors such as stock values, interest rates, real estate trends, and other tides of the financial world. It’s important to have an idea of overall trends so you can generally understand your financial health and have an idea of your true wealth.
💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
The Takeaway
True wealth can be an important factor in knowing when you might expect to retire. It’s a good idea to focus on your gains year over year, rather than the number you get at the end of the equation. If you’re concerned about your net worth or are hoping to increase it, especially for future retirement goals, then it might be helpful to consider investing.
There are a multitude of things that can have an effect on your net worth. And focusing strictly on your net worth probably shouldn’t be your focus. If you’re concerned about it, though, it may be worthwhile to talk to a financial professional.
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