When you hear the words “net worth,” you might envision bigwig billionaire celebrities or business tycoons. But the truth is, you don’t need to be rich to calculate your net worth, and it’s a number that you should know!
In celebration of Financial Planning Month, read this article for everything you need to know about net worth.
What is Net Worth?
Net worth is the sum of your assets minus the sum of your liabilities. In other words, it’s how much you have minus how much you owe. Net worth is a snapshot of your financial health and a guidepost on your road to achieving financial security.
How to Calculate Net Worth
It’s easy…we promise! Here’s how to do it:
- Add up the value of your assets, such as cash in checking and savings accounts, investment account balances, home equity, current car value, and worth of other valuable items.
- Add up the total of your liabilities, such as mortgages, auto loans, student loans, personal loans, credit card balances, and other obligations.
- Calculate your net worth by plugging your totals into this equation:
Total Assets – Total Liabilities = Net Worth
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Positive vs. Negative Net Worth
Net worth can be positive or negative. Positive and increasing net worth is an indicator of good financial health.
On the flip side, negative or decreasing net worth means that your liabilities are greater than your assets. Keep in mind that negative net worth is common, especially among younger adults who have student loans and new mortgages.
How to Improve Your Net Worth
Is your net worth negative or not as high as you’d like it to be? There are steps you can take to increase your net worth!
- Reduce debt: The first thing you should focus on is tackling your debts to decrease your liabilities. Budgeting and practicing debt reduction strategies will help you chip away at your liabilities until you can tip the scales in a positive direction.
- Increase income: Increasing your income is another way to improve your net worth. Asking for a raise at work, starting a side hustle or creating a passive income stream are all ways to boost your assets.
Net Worth and Retirement
Net worth is an important number to know, but it doesn’t necessarily paint the whole picture when it comes to quality of life in retirement.
That’s because the most important factor of a financially secure retirement is income. For example, if a retiree has relatively low net worth, but has a pension or other steady income stream covering their expenses, then they can still enjoy a very secure retirement.
Learn about how an annuity can help provide a steady income stream in retirement!
Net Worth Final Thoughts
Yes, net worth is an important marker of financial health. However, there are other important currencies that aren’t calculated into this number. Health, happiness and peace of mind aren’t part of the net worth equation, but they surely add value to your life.
Want more? Check out, How Life Insurance Can Help Ensure Financial Security
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