We hear a lot about net worth, but what exactly does net worth mean and why does it matter? Here, let’s learn more about what your net worth is, how to calculate it and the role it plays in your investment strategy and finances.
What Does “Net Worth” Mean?
Net worth refers to all of your assets minus liabilities, or what you own minus what you owe. For example, if your house is worth $1,000,000 and you have a $500,000 mortgage, you own $500,000 in equity.
How do you Calculate Net Worth?
To calculate your net worth, first, take an inventory of everything you own. Net worth generally includes cash, investments, property, vehicles and anything else you own. To get an accurate estimate for depreciating assets (such as cars), you may need to research how much they are currently worth. Remember, your net worth can include assets you are paying off (such as a home) because you will subtract what you owe.
Here are some things you should include when calculating your net worth (although this list isn’t exhaustive):
- Checking accounts
- Savings accounts
- CDs (certificates of deposit)
- Other cash
- Mutual Funds
- Treasury bills
- Bullion (silver, gold, etc.)
- Other investments
- Real estate (market value)
- Investment properties
- Jewelry, art and collectibles
- Other property
- Retirement accounts (IRA, 401(K), pension plans, etc.)
- Social security
- Other retirement assets
Once you have an inventory of everything you own, subtract what you owe. Here are some examples of liabilities:
- Auto loans
- Credit card debt
- Consumer loans
- Student loans
- Unpaid taxes
After subtracting your liabilities from your assets, you will have your net worth.
Net Worth and Your Financial Health
A lot of people talk about net worth as a part of your financial health and while it’s an important part, it’s only one part of your overall financial picture. There are many caveats and considerations with net worth.
For example, net worth doesn’t include your annual income, so someone with a high annual income but with higher expenses could have a lower net worth than someone with a lower annual income that invests in appreciating assets. Those focused on growing their net worth may consider investing in appreciating assets and lowering their debt and liabilities.
In addition, net worth may have implications on your taxes. Your tax bracket may be determined by your annual income, but those brackets don’t necessarily include net worth.1 So if you are a high-income earner, and have a high debt-to-income ratio, and are in one of the highest marginal rate tax brackets, you may accumulate net worth much lower than someone who makes less money annually, but has less debt, more appreciating assets and is in a lower tax bracket.
When working with a financial advisor, they may consider your net worth, but they may also consider your lifestyle and what is impacting whether or not you are accumulating wealth. Rather than look at net worth, many advisors instead look at investable assets, which is the amount of money you have ready to invest. Net worth can be tied up in property or other investments and may not be liquid enough to invest.
Understanding your financial health is important and net worth is just one component.