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Table of ContentsNet Worth What Does It Mean? Why Your Net Worth Is Important Why Knowing Your Net Worth Is Important FAQs
By JEAN FOLGER, Updated June 23, 2021
Reviewed by DORETHA CLEMON
Your net worth is the amount by which your assets exceed your liabilities. In simple terms, net worth is the difference between what you own and what you owe. If your assets exceed your liabilities, you have a positive net worth. Conversely, if your liabilities are greater than your assets, you have a negative net worth.
Your net worth provides a snapshot of your financial situation at this point in time. If you calculate your net worth today, you will see the end result of everything you've earned and everything you've spent up until right now. While this figure is helpful—for example, it can provide a wake-up call if you are completely off track, or a "job-well-done" confirmation, if you are doing well—tracking your net worth over time, offers a more meaningful view of your finances.
Your assets are anything of value that you own that can be converted into cash. Examples include investments, bank and brokerage accounts, retirement funds, real estate and personal property (vehicles, jewelry, and collectibles)—and, of course, cash itself. Intangibles such as your personal network are sometimes considered assets as well. Your liabilities, on the other hand, represent your debts, such as loans, mortgages, credit card debt, medical bills, and student loans. The difference between the total value of your assets and liabilities is your net worth.
Important: Because it's easy to inflate the value of your assets, it's better to err on the conservative side when assigning financial value.
Your net worth can tell you many things. If the figure is negative, it means you owe more than you own. If the number is positive, you own more than you owe. For example, if your assets equal $200,000 and your liabilities are $100,000, you will have a positive net worth of $100,000 ($200,000 - $100,000 = $100,000). Conversely, if your assets equal $100,000 and your liabilities are $200,000, you will have a negative net worth of minus $100,000 ($100,000 - $200,000 = -$100,000). Negative net worth does not necessarily indicate that you are financially irresponsible; it just means that—right now—you have more liabilities than assets.
Target Net Worth = [Your Age − 25] * [ 1/5 * Gross Annual Income]
For example, a 50-year-old with a gross annual income of $75,000 might aim for a net worth of $375,000 ([50 - 25 = 25] x [$75,000 ÷ 5 = $15,000]). This does not mean that all 50-year-olds should have this same net worth. The formula can be used simply as a starting point. Your ideal net worth may be much more or much less than the amount indicated by the guideline, depending on your lifestyle and goals.
When you see financial trends in black and white on your net worth statements, you are forced to confront the realities of where you stand financially. Reviewing your net worth statements over time can help you determine 1) where you are, and 2) how to get where you want to be. This can give you encouragement when you are heading in the right direction (i.e., reducing debt while increasing assets) and provide a wake-up call if you are not on track. Getting on track may include the following:
Knowing your net worth is important because it can help you identify areas where you spend too much money. Just because you can afford something doesn't mean you have to buy it. To keep debt from accumulating unnecessarily, consider if something is a need or a want before you make a purchase. To reduce unnecessary spending and debt, your needs should represent the majority of spending. (Keep in mind that you can falsely rationalize a want as a need. That $500 pair of shoes does fulfill a need for footwear, but a less expensive pair may do just fine and keep you headed in the right financial direction).
Pay Down Debt
Reviewing your assets and liabilities can help you develop a plan for paying down debt. For instance, you might be earning 1% interest in a money market account while paying off credit card debt at 12% interest. You may find that using the cash to pay off the credit card debt makes sense in the long run. When in doubt, crunch the numbers to see if it makes financial sense to pay down a certain debt, taking into consideration the impact of no longer having access to that cash (which you might need for emergencies).
Your net worth figures can motivate you to save and invest money. If your net worth statement shows that you are on track to meet your financial goals, it can encourage you to continue what you're doing. Conversely, if your net worth indicates room for improvement (for example, over time you have dwindling assets and burgeoning liabilities), it can provide a needed spark of motivation to take a more aggressive approach to saving and investing your money.
What Is the Difference Between Net Income and Net Worth?
You earn income if you either work for someone or run a business. Your net income is your income after taxes and payroll deductions, such as social security and money you contribute to your 401(k). This is different from your net worth, which is the total value of everything you own, minus all your debts.
How Often Should I Calculate My Net Worth?
There is no one set rule on how often. For some people, calculating net worth quarterly makes sense, while for others, a yearly calculation is best. Some advisors suggest you also recalculate after a large purchase or sale, like a house or car.
What Does Liquid Net Worth Mean?
Liquid net worth is the portion of your net worth that could be easily converted to cash in a day if need be, versus an asset that would take some time to convert, such as jewelry or property.