When you hear the term “net worth,” they probably conjure up images of oil tycoons and Wall Street bigwigs—you know, those folks who have more money than many third-world countries.
But tracking net worth shouldn’t stay relegated to the realm of billionaires because the concept actually has nothing to do with gratuitous wealth. Rather, net worth is simply the difference between your assets and your liabilities.
To figure out your own net worth, you need to tally up all of the money that you have and the value of the things you own. This includes what's in your checking, savings, retirement and investment accounts, as well as the market value of property that you own, including your home, your car, and even jewelry and collectibles.
Once you have these figures, then subtract all of the money that you owe, such as credit card debt and what's left to pay on your student loans, auto loans and mortgage. The remaining balance is your net worth. If you have more than you owe, you have a positive net worth. Conversely, if you owe more money than you have available to you, you have a negative net worth.
Seems easy enough to calculate, right? (And remember that you can have it automatically tabulated in the LearnVest Money Center after you’ve linked your various accounts. If you're a premium subscriber, you can even track changes in your net worth month by month via your progress board.) Yet many of us don’t know what our net worth is—much less keep tabs on it. But this simple equation is important because it gives you an easy way to answer a key question: How’s my money doing?
Why Your Net Worth Is Worth Knowing
Natalie Taylor, a Certified Financial Planner™ with LearnVest Planning Services, lists net worth as one of the top three numbers you should keep track of, along with your credit score and shorter-term monthly savings targets. It's because “net worth is a nice measurement of progress,” Taylor says. “Trends in net worth are more powerful than your actual net worth—so it’s more important to know if your net worth is more positive today than it was, say, six months ago.”
This also means that you don’t have to stress too much if you're currently in the red—what matters more is that you’re making your way steadily to the black. The reality is that a negative net worth isn’t something to be ashamed of, especially in the wake of large student loan burdens and a housing crisis that left many homeowners underwater.
“Some of these situations just are what they are," Taylor says. "But as long as you’re working diligently toward paying down your debt and not accruing more of it—and making savings contributions—then a negative number isn’t as much of a concern."
Think of it this way: Your net worth is a snapshot of your overall financial health. So the more you narrow the gap between positive and negative net worth, the more your vital signs are improving. After all, you can’t expect to go from the couch to running a marathon in a week’s time.
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Are You Moving the Net Worth Needle?
Of course, this doesn’t mean that you shouldn’t set goals or timelines for yourself when it comes to increasing your net worth, whether it's through gaining more income and growing investments or decreasing your debt.
“In my opinion, 28 to 30 is when you want to hit net zero if you have student loans,” says Peter Dunn, a personal finance expert and author of “What Your Dad Never Taught You About Budgeting.” Why 30? That’s around the age that you should be winding down your student loan payments and building up your 401(k) contributions.
Dunn also prefers to track his progress in percentages. “Personally, I like to increase my net worth each year by 25% of my take-home pay. So if my pay is $100,000, I want my net worth to go up by $25,000 a year.”
Taylor agrees that these rules of thumb can be helpful, but she notes that it’s hard to generalize because everyone is different. After all, some people go to grad school, and others don’t. Some lucky people receive an inheritance, while most of us don’t get a windfall. So the most important thing, she says, is to assess your situation and goals as you work toward a positive net worth.
One milestone Taylor does believe people should strive for, however, is being debt-free by retirement: “[And that includes] loans and mortgages. By retirement, ideally your net worth should be all assets, no liabilities.”
And regardless of whether your net worth is high or low, “you have to work on debt reduction and savings at the same time,” she adds. “That said, if you have a very negative net worth, debt reduction may take higher priority. So instead of thinking of it as a 50/50 split between debt repayment and savings, you might tip the scale more to debt reduction. On the flip side, if your net worth is healthy, maybe you can tip the scale more toward investing and saving, even if you have a mortgage.”
At the end of the day, net worth is revealing, but it isn’t everything. “You have to be able to balance short-term goals with long-term goals,” Taylor says. “This means it’s important to look at your finances on a micro level, as in, ‘What’s my budget this month, and what are my savings goals this month?’ And also look on the macro level, such as, ‘How is my net worth trending?’”
How to Use Net Worth as a Motivator
Knowing your net worth can also serve as an incentive to pay down debt and save for retirement, among other financial goals. “If I see that I made $10,000 of progress this year, despite the fact that my net worth might still be negative, that can be a real momentum-builder,” Dunn says.
Taylor has her own story of a net worth win. “When my husband graduated from business school, he had a negative net worth. He and I had a personal celebration when it reached zero, and we called it a ‘getting out of the red’ party,” she says.
But don’t feel as if you have to review your net worth with the same frequency that you balance your checkbook. In fact, Taylor recommends calculating your number every six months to a year. “If you check in smaller increments, it’s too much noise," she says, adding that if you had a large credit card bill one month, and it throws your net worth off momentarily, it may mentally throw you off too.
Dunn also advocates setting individual goals for specific areas that directly impact your net worth, like debt reduction, saving for retirement or building an emergency fund. “Refine a goal number for the next 12 months [for such goals, and figure out] how money will flow into those things,” he says.
If you want to increase your 401(k) contribution, for instance, commit to upping it 1% by midyear (say, in July) and then another 1% in December.
Admittedly, having a negative net worth can feel disheartening because it may seem like it's going to take forever to get to a positive number. When Taylor talks to people who are discouraged and tempted to make a move that could lower their net worth even more, she reminds them that the money decisions they make could impact other things they value, like family.
For example, she says, taking on debt also isn’t good for your spouse because he or she could be responsible for the debt if something happens to you. Avoiding smart money moves—like paying more than the minimum on your credit card payments—just because you don’t see immediate progress “is the same as saying, ‘I’m overweight, so what’s the difference if I have one cupcake?’” she says. “The difference is that you have the choice right now to move in a positive direction.”
To give yourself an added motivational push, Taylor likes StickK, a goal-setting website that lets you put a wager on the likelihood that you'll reach a long-term goal. An online community virtually cheers you on, but if you fall short, your credit card will be charged the amount that you bet. “Whether your main objective is paying down debt or increasing savings or both, it’s a fun way to raise the stakes,” she says.
And remember, Dunn adds, it's the small things that help move you toward a positive net worth. “As routine as it is," he says, "every time I make a mortgage payment, I think, ‘My net worth just went up!’”
Ultimately, says Taylor, it's important not to feel overwhelmed by your number: “We like to say, ‘Progress, not perfection.’”
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.