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Net worth is the balance of your assets and liabilities at one point in time. Calculating your net worth takes into account all of your sources of wealth minus the debts you owe. Regularly calculating your net worth helps you get a feel for where you’re at with your finances and gain insight into ways to improve your financial life.
What Does Net Worth Mean?
At its most basic, net worth is your personal balance sheet, according to Elizabeth Keatinge, a Certified Personal Finance Counselor and the founder of FundsSavvy.com. “Simply put, it’s what you own minus what you owe,” Keatinge says.
A positive net worth indicates your assets outweigh your liabilities, meaning you’re on track to building wealth. A negative net worth suggests there are parts of your financial life you need to improve.
When it comes to your net worth, the goal is to be “in the black,” says Keatinge. While some amount of debt is inevitable for most people, the higher your net worth, the more potential stability you have during times of economic upheaval, and the better positioned you are to take advantage of any opportunities that come your way.
In order to understand and calculate your net worth, you need to start by taking stock of all of your assets and liabilities.
What Are Assets and Liabilities?
Assets and liabilities are key components to your net worth. You’ll need to know all of what you own and owe to tabulate your net worth.
Assets
“Assets are the financial instruments and things that you own,” says Guy Baker, Ph.D., a wealth consultant and the founder of Wealth Teams Alliance. Some of the items that you can put in the “assets” column of your net worth calculation include:
- Cash in the bank, including checking and savings accounts
- Investment account balances, including retirement account balances like your 401(k) or individual retirement account (IRA)
- Your home equity
- Current price you could get from selling your car
- Valuable items you own, like collectibles, artwork or jewelry
Liabilities
Liabilities represent your obligations, or what you owe to other people or companies. While they may increase your purchasing power, they reduce your overall net worth because they represent money that isn’t truly yours. Liabilities include:
- Any balance owed on personal loans
- Credit card balances
- The unpaid balance of your home mortgages
- Outstanding student loans or car loans
- Other obligations, such as alimony or child support
How to Calculate Net Worth
Once you understand the value of your assets and liabilities, calculating your net worth is very straightforward. “To complete a net worth analysis, start with the total value of financial assets and subtract the total value of the financial liabilities,” Keatinge says.
Net Worth = Total Assets – Total Liabilities
One challenge you may face is understanding the value of your assets. “For instance, your car was purchased for a certain amount, but it immediately lost value when you drove it off the lot,” says Baker. Your car’s resale value may actually be less than the amount you owe on it, turning what might seem like an asset into a liability.
Similarly, asset values are often moving targets, as stock prices fluctuate daily and even things that might seem stable, like your home’s value, change based on current comparable market values.
Because most assets and liabilities are dynamic, not static, it’s important to keep in mind that any net worth calculation is simply a snapshot of your current situation. To understand your net worth more holistically, you should consider tracking it over time to see patterns and look for opportunities to grow your net worth more quickly.
Check out our net worth calculator to discover how your personal balance sheet looks.
Average Net Worth Examples
According to the Federal Reserve the average net worth for an American household in 2019 was $748,800. Broken down by age of the head of household, the average net worth is:
| Age (head of household) | Average net worth |
|---|---|
Under 35 | $76,300 |
35-44 | $436,200 |
45-54 | $833,200 |
55-64 | $1,175,900 |
65-74 | $1,217,700 |
75+ | $977,600 |
It’s important to keep in mind that these are averages which may be strongly influenced by small numbers of high-dollar outliers. The median net worth for an American household, for example, was only $121,700. A substantially lower median than mean (average) value suggests that many, many more people have substantially lower than average net worths.
Consider these five hypothetical net worths: $0, $100, $100, $100, $10,000. In this list, the average net worth would be $2,060, a number far greater than all but one of the actual net worths. That’s why looking at the median ($100) may better illustrate the reality many face.
Regardless of whether your net worth is closer to the mean, median or neither, remember your net worth isn’t a reflection of your personal value. Most people end up with a negative net worth at some point, and it doesn’t necessarily reflect poor financial habits. You may have to take out student loans to cover your education, for instance. And depending on the size of your loan, even if you’re making on-time payments, your net worth may be negative for a time.
How to Raise Your Net Worth
Means and medians notwithstanding, there are steps anyone can take to increase their net worth.
Pay down debt. Tackling debt reduces your liabilities. The fewer obligations you have, the more your assets can be used for your financial benefit. Consider using the snowball or avalanche method to get ahead of your debt.
Increase your income. If possible, boost your income by asking for a raise at work or by starting a side hustle. You may also research ways to start a passive income stream, like through dividend investing or buying and renting out real estate.
Add more to your retirement and investment accounts. Steady contributions to tax-advantaged accounts can help you grow your wealth and increase your net worth over time. You can also add more to taxable investment accounts to boost your net worth while retaining access to liquidity.
While net worth is important, “don’t forget to consider what you value in your life,” Keatinge says. “Even if your net worth isn’t at the number you’d hoped for, consider other factors. Maybe you have a flexible job that allows you to be available to your family.”
“Time, freedom, health and happiness are also currencies,” she continues. “They’re not factored into a traditional net worth analysis, but absolutely worth taking into account.”
