“Your net worth is not your self worth.”
You read and hear that everywhere. And it’s true. How much you have in the bank, or how few debts, is not a measure of your worth as a person. Especially when you look at things through a spiritual prism, having money does not make you a better person, or even a happier one.
Nonetheless, net worth does have a role to play. It is the ultimate financial score card (again, in non-spiritual terms).
So What Is Net Worth?
Net worth is the number you get when you subtract “what you owe” from “what you own.” In financial terms, it is assets minus liabilities.
Depending on which is bigger (what you own or what you owe), your net worth could be positive or negative. Positive is obviously better.
Keeping track of it is like keeping a score card. Early on, especially right after college, net worth is likely negative as school loans weigh heavily and what you own is limited. Then, just as you think you’re bringing that debt down, you buy your first house and take out a mortgage. The house is an asset, but the mortgage is a liability.
What this means is that throughout life you’ll be adding to and subtracting from your net worth. That, in turn, means that being in the negative is not necessarily bad. It’s the reflection of a moment in time.
But what must stay clearly in your mind is that your ultimate goal is to get your net worth growing in the positive column because it is what you will have when you look at the possibility of retiring.
How to Calculate Your Net Worth
Calculating your net worth is pretty simple.
On a piece of paper or a spreadsheet, list everything of value that you own (your assets): cash in bank accounts and on hand, value of all your investments, how much equity you have in your home, as well as how much you could sell your car(s), jewelry and other valuables for today. Don’t forget any valuable collections. This requires guessing or estimating street market value for many things, but that only has to be done once. And it doesn’t have to be super precise.
Next, list all your debts, anything you owe (your liabilities): the balance on your mortgage and any car loans, the total owed on your credit cards, anything left on school loans or any other loans you’ve taken out. (That includes money borrowed from friends and family, if any.)
Lastly, subtract your liabilities from your assets. What you get is your net worth. Positive or negative.
Why Do You Want to Know Your Net Worth?
By the time you retire, your goal is to have all assets and no liabilities. By keeping track of your net worth over time, you get a clear picture of whether you are headed towards that goal — or away from it. If you’re headed away from that goal, it can serve as a gentle alarm for you to look at your money decisions and behaviors.
How often should you check it? The answer is similar to that of how often you should step on the scale if you’re dieting. For diets, it shouldn’t be every day or you’ll get discouraged after eating one overly rich or salty meal.
For net worth, every six months is a good frequency, because fluctuations in credit card debt or a bonus received at any moment could skew the general direction you’re moving.
What’s most important is to keep the judgment out of that number. It’s a score card, remember? And you have the power to move that number up or down. While it’s pretty easy to fool ourselves about how we’re doing financially, this is one way to stay real honest with ourselves.
It’s a terrific little tool. And no one needs to know the number but you. (And your mortgage broker if you decide to take out a loan.)
A Little Perspective
The net worth of American families took a real hit in 2008. Today, according to Motley Fool contributor Selena Maranjian, it is back up somewhere between $100,000 and $200,000. Most of that is in the form of home equity.
Home values are starting to head higher, so fewer homes are “underwater” (where the mortgage balance is higher than the market value of the house). And those people able to play the stock market successfully have benefited from its skyrocketing performance.
Let us know in the Comments section below if you’ve ever figured out your net worth and if this explanation might make you more likely to do so.