1. Calculating Your Net Worth: Introduction
  2. Calculating Your Net Worth: Important Terms
  3. Calculating Your Net Worth: Why Net Worth Is Important
  4. Calculating Your Net Worth: Making Accurate Estimates
  5. Calculating Your Net Worth: Calculating Your Net Worth
  6. Calculating Your Net Worth: What Your Net Worth Means
  7. Calculating Your Net Worth: Building Your Net Worth
  8. Calculating Your Net Worth: Conclusion

If your net worth is a negative number, your debts exceed your assets. If your net worth is positive, your assets are greater than your debts. Keep in mind, your net worth figure is a snapshot of your financial situation at this point in time. A positive net worth now doesn’t guarantee one in the future; nor does a negative net worth today mean you are destined for a lifetime of debt.

It’s worth noting that it’s easy to want to compare your net worth to someone else's, but that’s not helpful. Someone else may have a higher net worth than you, but at what cost? Are they working 80 hours each week and leading an unhealthy and unsatisfying life (i.e. no exercise, no time with family, etc.)?

Rather than using your net worth to evaluate where you stand against your peers, use it to track your own progress over time. Just like a marathon runner gunning for her personal best, focus your attention on your own numbers – not someone else’s. (See Common Liabilities that Hurt Your Net Worth.)

Tracking Changes 

Your net worth will change over time in response to your income, spending and saving habits. As mentioned earlier, your net worth will ideally increase over time as you pay down debt, build equity in your home and enjoy salary increases as your career advances. It’s not uncommon, however, for your net worth to fluctuate in much the same way as your stock portfolio. (For related reading, see 7 Easy Steps to Negotiating a Raise.)

The value of your assets changes from day to day – look at the what a volatile housing market can do to home prices – and as a result you can hold the same assets but suffer a drop in value from one net worth statement to the next. Pay attention to the big picture. You have to set your own goals for where you want to be in one, five, ten or twenty years from now. By evaluating your net worth statements over time, you can tell if you are moving in the right direction, or if some changes are in order.

Life can also deliver some low blows that will show up in your net worth: a job loss, an illness, an unexpected move at a bad time for real estate values. Even with a good emergency fund to help you through it, there will be times when you take a hit. But that's not the only reason your net worth may experience slow growth or worse.

Lifestyle Inflation

Most people will spend more money if they have more money to spend. For instance, someone who is fresh out of college and not earning much money might be getting by on $2,000 a month for an apartment, used car loan, groceries, etc. When that person moves up at work, his or her monthly expenses will correspondingly rise. This phenomenon is known as lifestyle inflation, and it can be a problem because even though you might still be paying your bills, you are limiting your ability to build wealth. 

A driving force at work here is the keeping-up-with-the-joneses mentality. For example, many people who work at offices where "everyone" drives BMWs might feel the need to drive a BMW, as well. And it's not just cars – expensive homes, vacations, boats, private school tuition – there are endless ways to spend more than we need to or should. Family members can add to the pressure, pushing for clothes or experiences their friends have.

Being aware of lifestyle inflation can help you curb that spending appetite so that you can use the additional money you're earning to save and build wealth instead of buying stuff you don’t need. Remember, the Joneses are typically servicing a lot of debt over a period of decades. Just because they look "rich" doesn't mean they are. (For more, see How to Manage Lifestyle Inflation.)

Personal Wealth vs. Material Wealth

It should be noted that your net worth is the result of your income and spending; it isn't a measure of your personal happiness or life experiences. A high net worth doesn’t guarantee happiness or personal fulfillment, and a low net worth does not automatically deliver discontent. Your net worth statement isn't a valuation of your life experiences, which to many people represent a more accurate picture of "wealth" than numbers on a page. (Check out How to Budget and Spend to Maximize Your Happiness.)

All the same, making the choices that result in, say, more free time or more interesting work and less income, isn't an excuse for not managing your finances and not completing a net worth statement. Even if you are content leading a minimalist lifestyle and prefer to measure wealth in terms of happiness and experiences, you’re still going to have to plan for your financial future. And minimalist isn't a synonym for negative net worth. 

Calculating Your Net Worth: Building Your Net Worth
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