Net worth calculator: Complete financial health guide
No matter your age or stage in life, your net worth is important. In personal finance, net worth is a key metric used to measure your overall financial health. It can tell you how you’re doing financially and encourage you to save, budget, invest, and repay debt. Tracking your net worth helps you achieve your financial goals by providing a clear picture of your progress.
By calculating your net worth every month or quarter, you’ll find it easier to make smart financial decisions and achieve your long-term goals. Regularly reviewing your net worth can also help you understand your overall financial situation, including your assets and liabilities, so you can assess your financial stability.
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What is net worth in simple terms?
Your net worth is a snapshot of your financial health. Net worth is one of the key financial metrics used to assess your overall financial position. It shows the value of your assets—everything you own—minus your liabilities. If you find that your net worth continues to increase, you’re likely on the right track and should stay the course.
However, if your net worth decreases over time, it may be time to make some changes. Depending on your situation, you might need to cut your spending, reduce your expenses, increase your income, and/or pay off debt.
Ideally, your net worth will rise as you age, allowing your income and investments to grow while reducing your liabilities. Of course, you may find that factors such as higher inflation rates, the rising cost of living, job loss, and high-interest debt get in the way and make this a challenge.
Why your net worth matters to banks and lenders
When you apply for a loan or credit card from a bank, credit union, or online lender, your net worth will come into play. If you have a negative net worth or owe more than you own, some lenders may be hesitant to approve you. Lenders use your net worth to evaluate your financial standing and determine your creditworthiness. In the event you do get approved, you might have to settle for higher interest rates, which can significantly increase your overall cost of borrowing.
Understand that lenders prefer to lend money to those who are financially stable and able to repay loans in full and on time. A higher, positive net worth can position you as a strong, low-risk applicant and open the doors to a variety of financial products with lower rates and more favorable terms.
Net worth vs. income: Understanding the critical difference
Contrary to popular belief, net worth is not the same as income. Net worth and income are two financial metrics that provide different insights into your financial health. Your net worth describes your assets minus your liabilities. Your income, on the other hand, solely focuses on how much money you earn from your job, side hustles, business profits, rental properties, Social Security benefits, and other sources.
It represents one aspect of your financial health, but doesn’t guarantee you have a positive net worth. Even with a high income, you may overspend, go into debt, forgo a budget, and make other financial moves that hinder your net worth.
To truly understand where you stand financially, you have to look beyond your income. Since net worth accounts for everything you own but also considers your debt, it’s a much better indicator of your financial health.
As your income increases, it’s essential to grow your net worth and avoid lifestyle creep that may raise your liabilities and in turn, lower your net worth.
How to calculate net worth: A step-by-step guide
It’s easy to calculate your net worth once you know this net worth formula:
Assets – Liabilities = Net Worth
When calculating net worth, it’s important to understand the difference between total assets and total liabilities. Total assets include everything you own, while total liabilities are all your outstanding debts and financial obligations. This distinction is key to accurately assessing your overall financial health.
Here are the three steps involved:
1) Add up your assets
First, list all your assets. This includes liquid financial assets like checking accounts, savings accounts, and brokerage funds, as well as fixed assets like real estate, vehicles, investments, and personal valuables. Use the current market value or monetary value for each asset. If you’re unsure of an asset’s worth, online valuation tools can be helpful.
2) Add up your liabilities
Then, list all your liabilities, such as your credit cards, mortgages, home equity loans, car loans, student loans, personal loans, short-term liabilities, credit card balances, and credit card debt. Next to each liability, write down the outstanding balance and add all the balances up.
3) Subtract your liabilities from your assets
Finally, to calculate your total net worth, take the value of your liabilities and deduct them from the value of your assets. This equals your net worth.
How to interpret your net worth results
If you find your net worth is positive, congratulations. You own more than you owe. A negative net worth, however, means you owe more than you own. Your goal should be a positive net worth that increases over time. Achieving and maintaining a positive net worth contributes to your overall financial stability and provides greater financial flexibility to manage changes or opportunities.
To raise your net worth, contribute more to your savings accounts and investments, either manually or through automation. Note that this might require you to ask for a raise at work, pick up a side hustle, sell things online, or find other ways to increase your income. Having more money in liquid assets gives you the ability to handle unexpected expenses and ensures you are better prepared for financial emergencies.
Also, create a plan to repay your debt through a strategy like the debt snowball, debt avalanche, debt consolidation, or debt settlement. In addition, design a realistic budget for your income and lifestyle and make every effort to stick to it.
Net worth vs. liquid net worth: Key differences explained
Your net worth is the total value of your assets minus your liabilities. It differs from your liquid net worth, which reveals how much money you have in cash or assets that can easily be converted to cash after you subtract your liabilities.
While liquid net worth is similar to total net worth, it doesn’t consider nonliquid assets like retirement accounts or real estate investments. In addition to cash on hand, liquid net worth includes your checking and savings accounts, money market accounts, publicly traded stocks, bonds, ETFs, mutual funds, and certificates of deposit (CDs) that are close to maturity.
Your total net worth paints a picture of your overall financial health, whereas your liquid net worth explains how much money you have that you can quickly access during an emergency situation or hardship.
When to focus on liquid net worth
It’s important to know your liquid net worth when an emergency expense, such as a car repair or medical bill, pops up. A positive liquid net worth that continues to increase can ensure you have enough cash for these types of unforeseen situations.
It can also allow you to take advantage of investment opportunities without having to liquidate your long-term assets. Additionally, knowing your liquid net worth may aid with retirement planning as it can reveal how much you can withdraw annually.
To increase your liquid assets and, in turn, improve your liquid net worth, cut expenses, pay down debt, and implement a savings strategy that includes a fully funded emergency fund with enough cash to cover three to six months of living expenses. Keeping your emergency fund in a high-yield savings account can help you maximize your savings balances by earning a higher APY, ensuring your funds grow while remaining easily accessible.
Frequently asked questions about net worth
To calculate your net worth manually, use this formula: Assets – Liabilities = Net Worth. A net worth calculator can simplify the process.
Data shows that net worth tends to rise with age. If you’re 65, for example, you’ll likely have a higher net worth than someone who is 35, as you’ve had more time to grow your career and reap the benefits of compound interest from your investments.
To be in the top 1% you need a net worth of between 11.6 million and 14 million. A net worth of around 1.2 million places you in the top 5%.
Yes, your 401(k) is part of your net worth. It’s considered an asset similar to your bank accounts and real estate properties and can increase your net worth over time.