People talk about “net worth” but how do you actually find it? In this post, we’re going to look at net worth and why it’s helpful. We’ll also look at its one major downside of net worth.
Let’s start with the definition.
Net Worth Definition
Net worth is what you own minus what you owe, or your assets minus your liabilities. Assets are anything of significance that you own and liabilities are any debts that you possess.
Here’s an Example
Carl has a number of assets:
- House: $200k
- Car: $10k
- 401k: $40k
- Savings: $2k
This would total $252k in assets.
Carl also has a number of liabilities:
- Mortgage: $175k
- Car loan: $12k
- Student loans: $35k
- Credit cards: $6k
This would be $228k in liabilities.
Thus, Carl’s net worth is $252k – $228k = $24k.
Net Worth Calculator
Calculating net worth is pretty simple stuff overall but it is hard to remember everything. Like personal loans, HELOCs, and loans for other big ticket items like campers, ATVs and boats.
This is why I like this net worth calculator I’ll include here. It walks you through the items to include on both the assets and liabilities and automatically calculates it for you.
Why Does Net Worth Matter?
Net worth is a measurement. For some people it’s a good measure for their personal financial goals.
Increasing net worth is easy to measure, because if you save money, you increase your assets, and if you pay off debt, you decrease your liabilities. Both of which increase net worth.
It’s also something that can help you prepare for retirement. It’s just important to mention that there’s more to retiring than having a large net worth. If Carl has a $2M net worth at retirement, that all sounds great except having a $2M paid-for house with no cash or investments doesn’t put food on the table.
It may not be perfect but net worth is a good place to start when preparing for retirement. At least Carl could downsize to a smaller house and invest the money to live off of.
Here’s the Downside of Net Worth
Net worth, in many ways, can be confused with human worth.
Net worth does not equal human worth.
It doesn’t matter if your net worth is $1 billion or less than $10. Your worth as a human being is priceless so don’t let a number dictate how you see yourself or how you see other people.
So let me pass this question on to you. Is your net worth about where you want it to be for your age? Are you behind or ahead on a net worth goal?
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