Everyone has heard the term “net worth,” but a lot of people out there ignore how important it is because they just don’t think they’re a high enough earner for it to even matter.
It definitely can feel like it's something that wealthy people talk about while they're playing polo or doing whatever it is that rich people do.
But straight-up – knowing your net worth is important at any stage of your financial life.
It helps you assess how close you are to retirement (which we all need to be thinking about), the types of risk you can/should be taking, and is a good way to just check in on your finances.
Think of it as a snapshot of your financial situation. You can look at that picture and say “good job” or “time to buckle down.”
However, one of the biggest difficulties in calculating your net worth is just knowing how to do it. There is some great software out there that actually does it for you. If you’re interested in seeing how you are doing, Personal Capital is a free personal finance tool that aggregates all of your finances in one place, even calculating your net worth.
Even though knowing your net worth is important, never let anyone tell you that it is a valuation of your real personal worth. There are plenty of decent people who aren’t ranking high with their net worth, and there are plenty of idiots with a ton of money.
Your net worth is just a measure of your financial well-being.
Really, your net worth is one of the most personal things about personal finance, and you should know what yours is because it helps when you're trying to hit big financial milestones.
Why young people need to know their net worth:
For young people, calculating net worth can be a pretty shameful and daunting task, especially at the beginning of our working lives. You come out of college with tons of student loan debt and probably some ultra-fun credit card debt. You might even celebrate that huge amount of debt by rewarding yourself with a new car (aka Debtmobile)!
To top it off, maybe you are one of the lucky ones who lands some entry-level position that doesn’t even use your degree and WAY underpays you. Is this hitting too close to home for any of you yet? I get it. It's enough to bury your head in the sand and pretend that “net worth” is a fishing term for rich people.
If the above applies to you in any way, there is a good chance that you are starting out with a negative net worth.
With all of those factors working against you, especially you millennials, having a negative net worth isn’t that uncommon. At the same time, it isn’t something you should get comfortable with.
Take a look at my review of the free net worth tracking tool my wife and I use every day! We love Personal Capital because it makes keeping track of your finances easier than just using pen and paper.
Starting out with a negative net worth will impact your ability to make long-term financial gains. I know that’s a hard truth, but it’s important to say. Fortunately, starting out with a negative net worth doesn’t mean you will be stuck in a debt cycle.
The silver lining here is that if you make smart decisions with your money, your net worth will rise exponentially with time! However, you will need to know where you are starting to see the work ahead of you.
Even though it sounds daunting, it’s actually pretty easy to calculate.
Net worth is calculated by subtracting your liabilities from your assets.
To create your personal net worth statement, you will need a few things. First, you need to know the differences between your assets and liabilities, then make a list of each. For both assets and liabilities, you may need to do some research to get an accurate picture… put in the work and don’t just estimate here, that’s important.
Assets are items that have tangible value:
- Stocks and equities
- Home, at market value
- Estimated value of your car
Liabilities are items that you owe on or cost you money. Here are some examples that apply to the normal Millennial:
- Car Loans
- Student loans
- Credit card debt
I’m going to make this super simple for you. Assets – Liabilities = Net Worth. It's seriously that easy to calculate. It's probably harder for most people to figure out the differences between their assets and liabilities than the equation itself.
When figuring out those differences, first and foremost, your car or home are not assets if you owe more than they are worth.
Cars are almost always liabilities if you are financing one. Being able to sell your car does not mean that it will make you money, so please don't trick yourself into thinking that you came out ahead on that financed new car. I’ll say it again, cars are almost ALWAYS liabilities, unless they are really old or really awesome (think Ferrari).
You probably noticed that mortgage was listed as a liability and your home was listed as an asset. Contrary to popular American belief, a mortgage and home are not the same thing. A home is the thing you live in, but a mortgage is the thing that sucks the life out of you for the next 30 years.
If you bought a $100,000 home and still owe $70,000, that property is only a $30,000 asset – IF it would still sell for $100,000 or more. Your house DOES NOT need to be fully paid off to be an asset! The equity (money that you have paid toward the home) is your asset. Also know that your home’s value will fluctuate with the housing market.
Ready to get started? Pour yourself a glass of wine and take some time to sit down and figure out your net worth. Your future wealthy self will be glad you did!
And, even though that equation is pretty easy, you can try the free tool my wife and I use to keep track of our bank accounts, mortgage, student loans (when we had them), credit cards, and investments. Even though Personal Capital can do all of the work for you, you will have a much better understanding of your net worth if you also know how to calculate it yourself.