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Net worth is the total value of your assets, or everything you own, minus the total value of your liabilities, or everything you owe. Calculating your net worth periodically can help you determine your overall financial health and find out what you need to do to reach your financial goals.
Understanding Net Worth
Your net worth is a calculation that gives you a snapshot of where your finances stand at any given time. It essentially tells you how much you'd have if you sold everything you own. Doesn't sound practical? It's true that you're probably not going to sell off all your assets—but knowing what your net worth is can give you an idea about your financial health over time. That's because as you make sound financial decisions, your net worth ideally will increase. The flipside is true as well: If you increasingly get into debt as you get older, your net worth could plunge, leaving you in dire straits as you near retirement.
To understand net worth, you need to know what qualifies as an asset or a liability.
Your assets include the money in your checking, savings and retirement accounts as well as items such as your home and car that you may sell for cash. They also include the cash value of life insurance policies (though not term life insurance), personal items such as jewelry and art, and the value of investment accounts you hold.
Your liabilities are debts, or any amounts owed on a mortgage, car loan, credit card accounts, student loans, personal loans and the like. While your assets increase your net worth, your liabilities decrease it.
How to Determine Net Worth
Calculating your net worth is a fairly simple process that involves adding up all your assets and then subtracting your total liabilities. Follow these steps to calculate your net worth:
1. Make a List of All Your Assets and Their Values
Write down all of your assets. As noted above, these include your current checking and savings balances, your retirement savings and anything you own that has value. If you own a house or car, use its current market value when adding up your assets.
You may know what some of your assets are worth and not others. For example, unless you appraised your house within the past few months, you may not know its exact value. In these situations, you can go with estimates: Use websites like Zillow and Trulia to find out the estimated value of your home, and Edmunds and Kelley Blue Book to estimate your vehicle's value.
Once you've listed all your assets and their actual or estimated values, add up the numbers and you'll know the total value of your assets.
2. Make a List of All Your Liabilities and Their Values
Next, list all of your liabilities. Include the balances on your student loans, mortgage, auto loan, personal loans and credit card accounts. Add up all the numbers and you'll have the total amount of all your liabilities.
Finally, subtract your total liabilities from your total assets. The number you are left with is your net worth.
If the figure you calculated is negative, you owe more than you own. In the event it is positive, you own more than you owe. Of course, you should always strive for a positive net worth and make an effort to increase it as much as possible.
How Net Worth Impacts Credit
While your personal net worth may not directly impact your credit score, your assets and liabilities will play an important role in your creditworthiness. For example, if you apply for a mortgage, a bank may ask you to list your assets as well as your liabilities. If you have a negative or low net worth, you may not get approved.
The good news is there are ways you can increase your net worth.
Strategies to Improve Your Net Worth
If you need to improve your net worth to get on stronger financial footing, try the following tips:
- Pay down debt. If you're carrying high credit card balances that are incurring steep interest charges, work on paying off your credit card debt. If possible, add extra principal payments to your mortgage payment every month. Your lender will likely allow you to make the extra payment automatically. You can choose the extra amount to add—even a couple hundred dollars a month can help quite a bit. Or make your mortgage payments bi-weekly. Both strategies take time off the life of your loan and reduce the interest you'll pay on the mortgage—all helping improve your net worth.
- Increase your income. Consider getting a side hustle—driving for a car-sharing service or doing consulting work—or renting out a room in your house. Any extra cash you can pour into savings or debt payments will boost your net worth.
- Save more. If you don't carry much debt, then consider adding extra to your savings every month. Whether upping your retirement savings or your emergency fund, extra savings will put you in a better position to improve your net worth—and ensure you don't get caught in a tough situation if you're hit with a large unexpected expense or worse, with not enough money to retire.
Improving your net worth may give you the financial freedom to retire early or choose a career you love without worrying about money. Or it may give you the chance to pay cash for a new car or take a vacation every year without straining your budget.
The Bottom Line
Your net worth is a good indicator of how you're doing financially. It can motivate you to save and invest, spend wisely, and pay down debt. By calculating your net worth on a monthly or quarterly basis, you can make smarter financial decisions and meet (or even exceed) your long-term goals.