Calculating and understanding your total net worth is one of the first money moves you should make as you begin to organize, and therefore improve your finances.
What is Net Worth?
Net worth is the difference between what you own and what you owe. In more technical terms, it’s your total assets (everything you own) less your total liabilities (all your debt).
Another (and my preferred) way to think of it is the total cash you would have if you sold everything you own.
Let’s break it down in a simple example.
Assets:
- You own a house valued at $300,000
- You own a car valued at $10,000
- You have no savings in your retirement accounts
- You have a $2,000 checking account and a $6,000 emergency fund
Total Assets = $318,000
Liabilities:
- The mortgage on your house is $250,000
- You owe $12,000 on your car
- You have a personal loan for $8,000, but no other debt
Total Liabilities = $270,000
Total Net Worth = $48,000
[300+10+2+6-250-12-8=48]
You can calculate your net worth on a piece of paper. Alternatively, you can plug in your numbers to an online calculator like those at CNN or Kiplinger or download your own.
What Should My Total Net Worth Be?
You may be living paycheck-to-paycheck and barely be able to pay your bills, but have a positive net worth. This could happen if the value of your house increases significantly during a market boom.
You may have extra cash at the end of the month but have a low net worth. For example, if you don’t own a home or a car, and spend your cash as soon as you have it.
If you owe more than you owe, you’ll be in a negative position.
What defines a good score is personal, as are all things personal finance. It’ll be based on several variables such as your salary, your age, how long you’ve been tracking this metric, and lastly, where you are in your financial journey.
Regardless of whether you believe your net worth is good or not, it is one of the most valuable tools you can use to improve finances.
How to Use Your Net Worth to Improve Your Finances
Knowing your net worth can help you reach your financial goals, and can help you identify where you can improve. Think of it as a snapshot that can highlight areas for improvement.
For example, you may realize you owe more on your car than it’s worth. Until you take the time to pull up the value of your car, you may not realize it’s worth less than you owe (as per the example from above).
You can use this information to consider whether you should focus on paying down the debt on your car first or go ahead and take the hit, sell the car and buy something cheaper while you focus on other debt.
Lastly, it acts as a report card as you progress in your financial journey. Imagine looking back at how much it’s climbed year over year. This creates pure motivation to continue to make the right financial choices and to help you learn from your mistakes.
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