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

Knowing your net worth helps you figure out where you are financially at this point in time. Expressed as a dollar amount, your net worth represents your financial health and is essentially the result of everything you have earned and spent until now. While calculating your net worth one time is helpful, it’s more meaningful if you do it on a regular basis so you can see trends in your overall financial health. The frequency is up to you: Some people find once a year is enough, while others like the motivation that comes with keeping track of net worth every month.

It’s normal for young people (recent college grads, for example) to have a low (or negative) net worth. That’s because they haven’t earned much money yet and they are likely saddled with student loan debt. But you can have a negative net worth at any age. The reasons vary, of course, but things like unemployment, medical bills, student loans, divorce and foreclosure (or being underwater on your mortgage) often play a role. (For more insight, see The Importance of Knowing Your Net Worth.)

Ideally, you’ll build wealth during your working years as you pay down large debts, build equity in your home, earn more as your career advances and acquire more assets (not to be confused with simply spending more money). Once you stop working, your net worth may decrease as you tap into your savings for retirement. Still, it’s possible that your net worth will continue to grow during retirement, depending on the income you earn from various investments, such as dividend-paying stocks. (To learn more, see How to Live Off Your Dividends.)

This is how your net worth might change over time:

Figure 1 An example of how net worth might change with age.

On Track or Room for Improvement?

When you look at your financial trends in black and white – on your net worth statements – you see the realities of where you stand financially and where you are headed. Reviewing your net worth statements over time can provide encouragement if you are on track – reducing debt while increasing assets – or provide a wake-up call if you’re not, if as your grade school teacher may have written, you have "room for improvement." If you're doing well, you can use the information to identify ways you might be able to do even better. As your assets grow, for example, you may become eligible for investments that pay better.

Spend Wisely

By looking at your net worth – especially over time – you can identify areas where you spend too much money. Just because you can afford something doesn't mean you have to buy it. To keep debt from accumulating, consider if an expense is a need or a want. It's okay to buy some things you want, but you’ll have to keep that type of spending in check if you want to build your net worth. (For further reading, see How to Manage Lifestyle Inflation.)

Pay Down Debt

Keeping tabs on your assets and debts can help you develop a plan for paying down debt. For instance, you might be earning 1% interest in a money market account while at the same time your car loan is costing you 4% interest. You may find that using the cash to pay off the car loan might make sense in the long run. When in doubt, crunch the numbers to see if it makes financial sense to pay down debt. (See To Invest or to Reduce Debt, That’s the Question.)

Save and Invest

You may be more motivated to save and invest your money by keeping track of your net worth. If your net worth shows you are on track – that’s fantastic. It can encourage you to continue what you're doing. If not, it can provide that extra incentive to start being more proactive about saving and investing.

Financial Blueprint

Being aware of your net worth can help you create a financial blueprint – a plan for your financial future. Consider a construction project. As we can all envision, having a well-planned blueprint for a construction project is vital to its success. Imagine, for example, building your dream house without a blueprint. You would certainly save money by not hiring a qualified architect, but how would the builders know what to do? What happens when the ceiling collapses because an internal wall wasn't built to be load-bearing? What do you do if all the drywall is in and painted, but nobody put in the wiring? We understand and accept the fact that all construction projects start with a blueprint. No builder would work without one.

When it comes to their financial future, however, people are often willing to wing it due to lack of interest or time, or because they're under the false assumption that there’s nothing they can do to create a better financial future. What many people don't consider is that, like construction projects, our financial futures also require a blueprint – something that tells us where we are now, where we want to go and how to get there.

Calculating your net worth is important because it allows you to evaluate where you are now, and helps you make decisions that will affect how you reach your financial goals – whether it's saving for the kids' college, your dream home or your retirement years. Even if your current financial situation truly is a "fixer-upper" (like an old house that needs a complete renovation), you can take charge and make changes that will positively affect your financial future. Keep in mind, you have to set goals to reach goals. It's impossible to reach your goals if you never make them.

Planning to Never Retire Is Not a Plan

Many people have given up on the idea of retiring and instead plan to never retire at all. Guess what? That’s not a plan. Even if you think you’ll just keep working forever, unexpected events – such as your health or a job loss – can force you into a retirement you never intended to take. You might even have to leave the workforce to take care of a family member full time.

Planning to never retire is not a practical retirement strategy. Keep in mind, even if your financial outlook looks bleak right now, you can make plans to improve your situation in the future. (For more, see How FMLA Works & Protects Your Job.)


Calculating Your Net Worth: Making Accurate Estimates
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