Understand the Meaning of Net Worth and Learn How to Calculate It
We hear a lot about net worth, but if you're like many of us, you probably wonder exactly it means and why it matters? Let’s explore net worth and learn how to calculate it and the role it plays relative to 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 $400,000 and you have a $200,000 mortgage, you own $200,000 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 should research how much the items are currently worth. Remember, your net worth can include assets you are paying off (such as a home) because as part of the equation, you will subtract what you owe.
Here are some of the things you should include when calculating your net worth (although this list isn’t exhaustive):
Cash
- Checking accounts
- Savings accounts
- CDs (certificates of deposit)
- Other cash
Investments
- Stocks
- Bonds
- Mutual Funds
- Securities
- Treasury bills
- Bullion (silver, gold, etc.)
- Other investments
Property
- Real estate (market value)
- Investment properties
- Vehicles
- Jewelry, art and collectibles
- Other property
Retirement
- Retirement accounts (IRA, 401(K), pension plans, etc.)
- Other retirement assets
Once you have an inventory of everything you own, subtract what you still owe money on. Here are a few examples of liabilities:
- Auto loans
- Mortgages
- 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 financial health. While it’s an important part, it’s only one part of your overall financial picture. There are many caveats and other considerations when you think of 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 interested in growing their net worth may consider investing in appreciating assets and lowering their debt or 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 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 building 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. It is important to educate yourself and develop a relationship with an objective financial advisor, who is a fiduciary, to partner with you on your journey to financial wellness.
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This content is developed from sources believed to be providing accurate information, and provided by Kelly Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
